The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today assigned an issuer rating of BBB-/Stable to Finnish growing media company Neova Oy. Scope has also assigned ratings of BBB- to senior unsecured long-term debt and S-2 to short-term debt issued by the entity.

Rating rationale

The assignment of a BBB- issuer rating is based on the moderate business risk and financial risk profiles of Neova Oy (both assessed at BB+) paired with the group’s status as a government-related entity, which guarantees public support amid potential liquidity needs. The Stable Outlook reflects Scope’s expectation that credit metrics will remain fairly stable over the next few years, along with the belief that the group’s ownership structure and its role in Finland’s energy environment will not change.

Neova’s business risk profile is based on its solid competitive position as an international leading player in the growing media sector (i.e. substrates, mulches and organic fertilisers for professional growers, home gardeners and landscapers), especially in Europe, where the group is the market leader through its subsidiary Kekkilä-BVB. The company’s leadership is based on a strong competitive advantage, deriving from its privileged access to raw material resources (mainly peat), the capacity to offer tailor-made products, and its geographical presence and proximity to clients, due to several production facilities across Europe, which reduces logistics costs and times. Moreover, regarding its fuels business, Neova is still the leader in Finland with a market share of around 60% for energy peat and 50% for pellets. Scope expects the issuer to maintain these market shares in fuel in the coming years, although the company plans to exit this activity in the medium term.

Neova is also engaged in the sustainability and ecological transition. Its products, including horticultural peat and other substrates, are essential in local, clean and green food production as they are a more sustainable and environmentally friendly alternative to traditional chemical fertilisers (positive ESG factor). At the same time, the group’s exposure to energy peat, a very polluting fossil fuel, poses some regulatory, environmental and political risks (negative ESG factor), though this exposure is limited due to the envisaged divestment of this business.

The company displays solid diversification. While it operates in over 100 countries, its domestic market is predominant (above 30% of revenue) and Europe generates around 90% of turnover. However, this concentration risk is curtailed by the highly fragmented base of professional (B2B) and retail (B2C) clients.

Profitability represents the weakest driver of Neova’s business risk profile. The EBITDA margin, averaging around 10% in recent years, is comparatively low for a chemical company. In 2022, the Scope-adjusted EBITDA margin declined to 9.1%, mainly driven by the effect on Neova’s core business of unfavourable macroeconomic trends such as inflation and rising interest rates. Profitability remained under pressure in 2023, mainly due to lower sales amid the general declining demand in the growing media market. Nevertheless, the Scope-adjusted EBITDA margin is expected to slightly recover and return to around 10%. This will be sustained by cost savings, though their benefits will end in 2025. Indeed, profitability is likely to strengthen over the next two years, while remaining only slightly above 10%, supported by the increasing contribution from real estate (i.e. renewables projects) and the new activated-carbons business.

Neova’s financial risk profile shows a moderate and balanced financial structure, sustained by a good capacity to generate operating cash flow, although high capex in 2022 weighed on leverage. Indeed, during 2022 Scope-adjusted debt rose significantly, reaching EUR 158.9m (up from EUR 28.8m as at December 2021), mainly due to the acquisition of 30% minority stake in subsidiary Kekkilä-BVB (making it fully owned) for EUR 72m and dividend payments of EUR 60m. As a result, leverage increased to 3.2x at YE 2022 (up from 0.5x as at December 2021), also due to the weaker Scope-adjusted EBITDA (down EUR 7.8m YoY). Based on interim results as of September 2023, Scope-adjusted debt is expected to slightly decrease from the December 2022 amount. This will help leverage to improve slightly but it will remain at around 3.0x as the operating margin is estimated to remain fairly stable on the 2022 value. The same dynamic is expected in 2024, but in 2025 the envisaged growth of EBITDA paired with a lower net financial debt should result in leverage moving towards 2.5x.

Debt protection is credit-supportive for Neova, due to good values of Scope-adjusted EBITDA/interest cover of around 5x to 6x until 2022, albeit burdened by increasing interest payments. Interest cover is expected to improve in 2023, benefitting from the significant reduction of short-term debt that leads to lower interest payments. This ratio is projected to remain more comfortable in the next two years at 8.0x-9.0x, due to the likely reduction of interest thanks to lower debt and forecasted EBITDA growth (mainly in 2025).

At the same time, the financial risk profile is constrained by the weak cash flow cover, which returned to moderately positive in 2022 (Scope-adjusted free operating cash flow/debt of 4%) after the negative free operating cash flow in 2021. Internal financing capacity is likely to also remain weak in 2023 and the two subsequent years, partly burdened by increasing capex. However, the expected free operating cash flow, positive albeit limited, should be sufficient to progressively reduce indebtedness considering low dividend payouts forecasted for the next two years.

Neova’s liquidity profile is solid. This is shown by the liquidity ratio of well above 110% in 2022, which Scope expects to remain at such levels, even from 2023, benefitting from the large cash (and cash equivalents) availability, positive free operating cash flow and adequate amount of committed unused bank facilities. This is also due to sustainable levels of debt maturing to be refunded over the next two years, while the EUR 110m bond maturing in November 2024 is expected to be largely refinanced.

Neova’s credit-neutral financial policy is deemed prudent. The group’s commitment to maintaining a solid financial structure is confirmed by its optimisation of operating costs and revision of its investment plan and M&A with a view to greater caution.

Scope defines Neova as a government-related entity in accordance with Scope’s Government Related Entities Rating Methodology, based on the public ownership (Finnish state owns 50.1% of shares) and the public importance of certain services provided in Finland by the group. This is signalled by the status as a company of strategic interest for the state. Based on the high capacity and medium willingness of the Finnish authorities to provide financial support if needed, Scope has applied a one-notch uplift to the standalone credit assessment.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Neova’s financial risk profile will remain fairly stable over the next few years, with Scope-adjusted debt/EBITDA standing at around 3.0x despite the weak cash flow cover (Scope-adjusted free operating cash flow/debt only moderately positive). This is supported by Scope’s assumption that the company’s EBITDA margin will be retained above 10%. The Outlook is also based on Scope’s view that the Finnish state will continue having a strategic interest in Neova based on the group’s ownership structure and its role in the energy environment in Finland.

A positive rating action could be considered if Scope-adjusted debt/EBITDA moved to 2.5x or below on a sustained basis, along with a strengthening of cash flow cover (i.e. Scope-adjusted free operating cash flow/debt above 5%).

A negative rating action could be triggered by a deterioration of credit metrics, with Scope-adjusted debt/EBITDA sustained at around 3.5x, or by any change that negatively affects Scope’s view of Neova’s GRE status as a company of strategic interest and thereby its potential for support from public authorities.

Long-term and short-term debt ratings

Scope has assigned a BBB- rating to senior unsecured debt issued by Neova Oy, the same level as the issuer rating.

Neova regularly uses Commercial Paper, under a Euro Commercial Paper programme with a maximum of EUR 150m (about EUR 32m used as of November 2023). The programme is usually renewed every year on a rolling basis as it provides useful and cheap resources for working capital requirements and treasury optimisation. Scope has assigned a S-2 short-term debt rating, based on the underlying BBB-/Stable issuer rating and an overall solid liquidity profile signalled by robust expected liquidity and good access to external funding from banks, the capital market and other funding channels.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 16 October 2023; Chemicals Rating Methodology, 17 April 2023; Government Related Entities Rating Methodology, 13 July 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlook and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings and/or Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Marco Romeo, Senior Specialist
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 December 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 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.