Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for ENSI Kft. (rated B+/Stable; senior unsecured debt rating B+) on 12 December 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com. 

Key rating factors

After reviewing ENSI’s YE 2022 and 8M 2023 interim financial results, Scope has concluded that the business and financial risk profiles are in line with Scope’s expectations.

ENSI Kft.’s business risk profile (assessed at B) continues to be driven by strong operating profitability, with Scope-adjusted EBITDA margin showing gradual improvement since 2021 (2022: 7.3%, 8M 2023: 13.2%). Beyond 2023, Scope expects the Scope-adjusted EBITDA margin to remain under pressure from the softening end-market demand, on top of still sizeable cost inflation projected for 2024. Despite these negative effects, Scope expects the Scope-adjusted EBITDA margin to stay in the 7%-8% range. ENSI’s order book as of October 2023 was around HUF 35bn, a significant improvement compared to the previous review in January 2023 (HUF 31.5bn). This is due to the periodic nature of foreign direct investment and several large-scale investments reaching their construction phase in 2023-2024. This increase in order volume is temporary; in the medium term, the backlog is expected to remain around 1x.

The business risk profile is constrained by ENSI’s still limited absolute size in a European and global context. While ENSI remains market leader in the niche segment of mechanical engineering on the Hungarian market, the size of the company is still limited compared to dominant construction market players in Hungary, which are the general contractors with a wide scope of activities and a strong focus on public procurement. The business risk profile is also constrained by the limited diversification in terms of activity, geographies and customer portfolio. The main focus of ENSI’s activity are mechanical engineering projects of above 20,000 sq m, i.e. large-scale projects involving specialised knowledge and high added value. Customer concentration remains high, with revenue from Market Építő Zrt, ENSI’s biggest customer, accounting for approximately 50% of total revenue in 2022 (top five: 94%). Limited diversification makes the company more vulnerable to macroeconomic shocks and reduces its ability to mitigate economic cycles.

The financial risk profile (assessed at BB+) is supported by credit metrics remaining robust amidst challenging market conditions. Other than a HUF 5.5bn senior unsecured bond issued in January 2022, ENSI still operates without any short- or long-term debt. Scope assumes leverage, measured by Scope-adjusted debt/EBITDA, will be around 3x in upcoming years. Due to the fact the company has historically operated without bank debt, ENSI used to have minimal interest expense. Since the HUF 5.5bn bond issuance in 2022 with 4.75% coupon rate, the company’s interest expense has increased to HUF 325m yearly. Additionally, the unused bond proceeds generate interest income, as half of the funds that are not yet spent on acquisition is kept in monthly deposit. The EBITDA interest cover is forecasted to gradually deteriorate in line with the lower interest income, at 11x until 2024, and below 10x in 2025 due to the more conservative profitability forecast. While cash flow cover, measured by Scope-adjusted free operating cash flow/debt, is expected to be more volatile than EBITDA, driven by the change in working capital needs, it is expected to remain at 20%-30%. Scope expects liquidity to remain adequate, with no short-term debt amortisation until 2027 and positive free operating cash flow.

Scope highlights that ENSI’s senior unsecured bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 5.5bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 30 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is zero notches. Given the limited headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

The Outlook and rating-change drivers have been kept unchanged. The Stable Outlook incorporates Scope’s assumption that ENSI’s credit metrics will remain stable despite a more challenging market environment, with a Scope-adjusted debt/EBITDA ratio below 4x in upcoming years.

A positive rating action is remote but could be warranted if ENSI managed to improve its business risk profile. This could occur if ENSI provided higher visibility on future cash flow and achieved greater geographical diversification while improving profitability to near historical averages (Scope-adjusted EBITDA of around 14%) and keeping its Scope-adjusted debt/EBITDA ratio around 3.0x in the medium term.

A negative rating action might occur if ENSI failed to achieve a Scope-adjusted EBITDA margin above 7%, which would also lead to increased leverage, measured by Scope-adjusted debt/EBITDA increasing to above 4.0x.

The methodologies applicable for the reviewed ratings and/or rating Outlooks (General Corporate Rating Methodology, 16 October 2023 and Construction and Construction Materials Rating Methodology, 25 January 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. 
Lead analyst Istvan Braun, Associate Director 

© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.