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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B issuer rating on Szinorg Universal Zrt. (Szinorg) and revised the Outlook to Stable from Negative. Scope has also affirmed its B+ rating for the senior unsecured debt category.

Rating rationale

The return to a Stable Outlook reflects the higher EBITDA contribution of Szinorg’s real estate portfolio, alongside an expected stabilization of Scope-adjusted EBITDA margin at a moderate level above 5%, supported by higher margin activities (real estate and accommodation management). After a period of investment, the group’s plan to strengthen its pipeline by building up a real estate portfolio that generates recurring income and sales proceeds started to bear fruit in 2023. Around 30% of the total HUF 55bn investment planned has been executed as of December 2023.

Szinorg’s business risk profile (revised to B from B-) continues to be affected by the group’s small scale in a European context, which limits diversification and weakens the ability to mitigate economic cycles and benefit from economies of scale. Scope recognises some improvement in diversification, following the delivery of a few real estate properties that provide recurring income.

Szinorg’s preliminary EBITDA figures for 2023 show an increased share of recurring income from its real estate portfolio, with a contribution of 25% in 2023, that is expected to rise to above 40% by 2025. As at end-December 2023, the portfolio of finished assets includes the Bajcsy/Mercure Hotel, that opened in August 2022, and two industrial properties encompassing 23,000 sq m of gross lettable area (Szinorg owning 50% of these properties). These industrial assets are 100% occupied and are leased on a long-term basis (weighted average unexpired lease term of 10 years as of December 2023) helping to keep Szinorg’s recurring income relatively stable and partially offsetting the highly cyclical nature of the construction business.

Revenue increased by 29% YoY to HUF 25bn in 2023, outperforming Scope’s previous rating case by 19%. This growth was mainly driven by a single project - the construction of a high bay warehouse for an international company. Scope-adjusted EBITDA increased by 39% YoY to HUF 2.3bn in 2023, while profitability, as measured by the Scope-adjusted EBITDA margin, reached 9.3% for FY 2023 (3.6pp above Scope’s forecast). This increase can be attributed to the higher margins in construction works, largely a result of better contract negotiations, despite an increase in project cost, such as labour. Additionally, the group’s EBITDA benefitted from the full year operation of the hotel property, which doubled its EBITDA compared to the initial forecast. Conversely, the profitability margin in 2023 was negatively impacted by the higher-than-anticipated personnel costs, largely driven by changes in the corporate incentive programme. However, this impact will be somewhat offset by Szinorg’s plan to optimise the group’s structure including the merger of two large construction subsidiaries in 2023, which is expected to generate annual payroll cost savings of around HUF 200m.

Scope expects Szinorg’s profitability margin to decline, but to stabilise at a moderate level of above 5%. This margin will reflect the company’s business profile: (i) constrained by its construction business, which is facing increased competition and typically lower margins ranging 5% to 10%; (ii) but supported by higher margins from hotel operations (averaging around 20%) and letting activities (with margins exceeding 80%). The latter also provides some visibility on future cash flows, which are backed by long-term leases. The backlog, however, remains concentrated, with the top three and ten projects accounting for 50% and 93% of future contracted revenues, respectively. There is a persistent cluster risk in the order backlog, as the significant project signed in early 2023 continues to be the largest in the group’s project pipeline. Such concentration carries the risk of considerable cash flow volatility if projects are delayed or cancelled.

The financial risk profile (revised to B+ from B) is constrained by Scope’s expectation of higher leverage and negative free operating cash flow. This is attributed to increased working capital needs and the substantial investment in the real estate portfolio. Scope expects that while the real estate portfolio, along with the construction backlog, will continue to strengthen revenues and cash flow, credit metrics will come under pressure over the next few years. The funding for the business plan includes the HUF 5bn senior unsecured bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme and bank loans. As of December 2023, the bank loans amounted to HUF 1.8bn and the group plans to add additional loans totalling approximately HUF 6.8bn by 2025. Regarding Szinorg’s financial obligations (including bank loans and bond), 80% are subject to fixed interest rates. As at end-2023, cash reserves were higher than financial debt, yet Scope anticipates an increase in leverage to above 9x by the end of 2025. This projected increase in leverage is due to upcoming real estate developments and its deferred contribution to Scope-adjusted EBITDA.

The interest result was positive in 2023, supported by income from investments in securities and low debt expenses, as the HUF 5bn bond carries a fixed rate of 3%. Scope anticipates that the interest result for 2024 will remain positive, given the company’s high cash balances that will offset expected higher interest expenses due to increased leverage. However, the interest cover is expected to weaken from 2025 onwards because of the planned increase in bank loans to finance further real estate developments. Additionally, floating rates on 20% of the interest-bearing debt leave the group vulnerable to potential fluctuations in the Euribor rate.

Liquidity remains adequate, with over HUF 13.0bn of cash and equivalents as of December 2023, alongside available overdrafts totalling HUF 2.3bn. The debt maturity profile is back loaded, featuring a HUF 5.0bn bond maturing only in 2030, with no significant repayments required prior to that date. Nonetheless, external liquidity will be necessary to finance capex and working capital requirements.

Scope highlights that Szinorg’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 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 0 notches.

Given the limited rating headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

Outlook and rating-change drivers

The Stable Outlook reflects the improved share of contribution of real estate asset in the group’s EBITDA, which strengthens the company’s recurring income base and partially mitigates the volatility related to the construction business. The real estate assets deliver higher profitability margins, which should also counterbalance the margin of construction activities that remains under pressure. The Outlook also incorporates the commencing of five real estate projects in the first half of 2024 and successful completion of current construction backlog. It also assumes ongoing adequate access to external financing to fund the company’s business plan.

A positive rating action is remote but could be justified if the group’s business risk profile improved, with a significantly larger development pipeline including a backlog of more than one year and improved diversification (by customer and project), while Scope-adjusted debt/EBITDA remained at around 4x, enabled by a higher-than-anticipated recurring EBITDA contribution from the issuer’s investment properties.

A negative rating action could occur if the backlog deteriorates to below 1x. It could also occur if liquidity worsened, for example, through significant delays in customer payments or non-recoverable cost overruns in projects.

Long-term debt ratings

The rated entity issued a HUF 5.0bn senior unsecured corporate bond (ISIN HU0000359633) in 2020. Scope’s recovery analysis is based on a hypothetical default scenario in 2025, which assumes outstanding senior unsecured debt of HUF 5.0bn, additional bank loans of HUF 9.0bn and drawn overdrafts of HUF 2.3bn (assuming the group draws all available lines). Scope expects an ‘above-average’ recovery for senior unsecured debt and has therefore affirmed the B+ rating for this debt category (one notch above the issuer rating).

The rating was prepared with the application of Scope’s Construction and Construction Materials Rating Methodology, 25 January 2023. The application of the Construction and Construction Materials Rating Methodology, 25 January 2024, does not have an impact on the rating.

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; Construction and Construction Materials Rating Methodology, 25 January 2024), 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, Outlooks 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation     YES
With access to internal documents                                        YES
With access to management                                                 YES
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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 25 February 2020. The Credit Ratings/Outlook were last updated on 1 February 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
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