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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB-/Stable issuer rating of Hungarian construction company ÉPKAR Zrt. Scope has also affirmed the company’s BB senior unsecured debt rating.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: B (unchanged). ÉPKAR’s business risk profile remains driven by its position in the Hungarian construction sector, which has experienced continued growth, allowing the company to capitalise on market trends and strengthen its solid market position. Revenue is expected to grow by 31% in 2024 to HUF 36.7bn (EUR 92.9m), primarily due to (i) delayed invoicing from 2023 and (ii) solid improvements in the order backlog, which now covers 2.9 years of work (up from 2.3 years in 2023).

Despite these strengths, ÉPKAR’s smaller size, compared to key competitors, constrains its ability to navigate economic downturns and weighs on its overall rating. The company’s operations are concentrated in Hungary, with 40% of its activity based in Budapest, and the remainder spread across the country. This limited geographical diversification makes it more susceptible to local construction cycles and economic fluctuations.

To reduce its dependence on government contracts, ÉPKAR has significantly shifted towards private sector projects, with 45% of FY2024 revenue expected from private clients, compared to 2021, when 97% of the backlog was tied to public projects. This strategic shift helps mitigate risks associated with delayed government funding but introduces greater competition in the private sector.

Although ÉPKAR’s backlog remains concentrated, with the top three projects accounting for 44% of contracted backlog in 2024, the overall backlog has grown to HUF 82bn, providing improved visibility on future revenues. Additionally, the acquisition of the R70 office building has provided a stable rental income stream, though its impact on overall EBITDA remains minor, contributing less than 10%. However, this diversification into real estate offers some resilience against the cyclical nature of construction activities.

ÉPKAR's operating profitability, as measured by the Scope-adjusted EBITDA margin*, was 18.4% in 2023, following an exceptional 18.9% in 2022. The margin is expected to remain stable at around 14% for 2024 and 2025, driven by more normalised operating costs, a strong private sector pipeline, and the stable revenue stream provided by the R70 office building. This combination of construction and real estate income helps mitigate volatility and supports sustained profitability over the forecast period.

Financial risk profile: BBB (unchanged). The financial risk profile remained stable, supported by strong debt protection, relatively low leverage, and healthy cash flow coverage. Credit metrics benefit from a substantial cash buffer, no short-term debt, and fixed interest rates on long-term facilities.

Debt protection remains strong, with EBITDA interest coverage consistently exceeding 10x in recent years. In 2023, interest coverage turned net positive due to interest income from deposits and marketable securities. This trend is expected to continue into 2024 and 2025, given the issuer’s cash reserves and returns from invested assets. The only interest-bearing debt is the HUF 11bn bond, fixed at 3%, with no amortisation until 2027. Scope forecasts that interest coverage will remain comfortably above 10x or net positive, supported by free operating cash flow (FOCF), which will help reduce leverage and future interest costs. However, potential risks include delays in converting the backlog into contracted revenue or delayed payments, and limited backlog visibility beyond 2025 introduces further uncertainty.

Leverage, as measured by debt/EBITDA, increased to 2.3x in 2023 (2022: 1.2x), reflecting a more conservative approach by applying a 50% cash haircut to account for fluctuations in cash balances throughout the year. With limited financing needs over the short to medium term, stable FOCF, and no anticipated capital raises, ÉPKAR’s leverage is expected to remain stable through 2024, 2025, and 2026. This stability is further supported by a solid order backlog for 2024 and 2025, normalised operating costs, consistent cash flow from its rental segment, and reduced advance payment guarantees. Leverage, as measured by funds from operations/debt, is projected to remain between 35% and 45% (2023: 48%, down 27pp YoY), with low risk of deterioration in the medium term. However, the cyclical nature of the construction sector creates some uncertainty beyond 2025. EBITDA could drop to between HUF 3bn and HUF 4bn by 2026, though delayed projects may smooth out revenue into 2026. Despite these uncertainties, the company’s longstanding relationships with its substantial client base and its reputation for consistently delivering high-quality projects reduce the likelihood of a significant revenue drop into 2026. In addition, the significant increase in the valuation of the R70 office building, to HUF 19.1bn from HUF 10.7bn, and the fixed revenue it provides help mitigate downside risks.

FOCF has been volatile due to working capital fluctuations but remains positive. This volatility is expected to stabilise as inventory levels and receivables normalise in 2024 and 2025. The steady income from the R70 office building provides additional stability. Although ÉPKAR’s backlog is somewhat concentrated, the company is expected to maintain positive cash flow over the next 18-24 months.

Liquidity: adequate. ÉPKAR’s liquidity position is adequate, with cash sources, including unrestricted cash of HUF 15.7bn at end-2023, and forecasted free operating cash flow (FOCF) of around HUF 600m in 2024, projected to cover key cash outflows. Primary uses of cash include working capital requirements to support activity across numerous construction sites and ongoing capital expenditures, with no short-term debt obligations. The company has historically funded its operations from FOCF, supporting stable liquidity. Liquidity flexibility is further bolstered by anticipated investments in marketable securities, expected to provide additional cash sources in 2024.

Scope highlights that ÉPKAR’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 11bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (accelerated repayment within 90 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is 2 notches. Scope therefore sees no significant risk of the rating-related covenant being triggered. In addition to the rating deterioration covenant, ÉPKAR has no financial covenants attached to its bond, which constitutes the company’s only financial debt. The bond restricts dividend payments to 50% of profits after tax and includes a change of control clause, requiring that 51% of ÉPKAR remain held by the Szeivolt family.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating.

Outlook and rating sensitivities

The Outlook is Stable, reflecting Scope's view that credit metrics will remain solid, with the debt/EBITDA ratio expected to remain between 2-3x over the next 18-24 months. This is underpinned by ÉPKAR's ability to execute its order book, which provides solid revenue visibility into 2024-2025. The rental income from the R70 office building alone is expected to cover the company's interest costs. Despite challenges in the local construction market and an uncertain macroeconomic environment, ÉPKAR is expected to maintain controlled leverage. However, the overall rating is constrained by the company's comparatively weaker business risk profile, despite its good financial performance.

The upside scenario for the ratings and Outlook is:

1. A stronger business risk profile, driven by increased market share, a more diversified backlog, and greater exposure to market-based projects.

The downside scenarios for the ratings and Outlook are (individually):

1. Debt/EBITDA ratio of above 3.5x.
    
2. Backlog of less than one year.

Debt rating

In November 2020, ÉPKAR issued a HUF 11bn senior unsecured bond (ISIN: HU0000360045) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to acquire an office building in central Budapest to diversify ÉPKAR’s revenue by increasing rental income from real estate. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in four tranches, with 10% of the face value due in 2027, 20% in 2028, and 20% in 2029, followed by a 50% balloon payment at maturity in 2030. Scope still expects an 'above average' recovery for the company’s unsecured debt and has affirmed the senior unsecured debt rating at BB (one notch above the issuer rating).

Scope’s recovery analysis is based on a hypothetical default scenario at year-end 2025, assuming outstanding senior unsecured debt of HUF 11.0bn (bond) in addition to, operating guarantees of HUF 4.0bn, senior secured payables of HUF 2.1bn, and senior unsecured payables of 2.1bn.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

ÉPKAR Zrt.

Issuer rating: BB-/Stable, affirmation

Senior unsecured debt rating: BB, affirmation

*All credit metrics refer to Scope-adjusted figures.
 
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, (Construction and Construction Materials Rating Methodology, 25 January 2024; European Real Estate Rating Methodology, 28 March 2024; General Corporate Rating Methodology, 16 October 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, 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, the Rated Entities' Related Third Parties 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 these 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 Rating 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 Patricia 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 28 February 2020. The Credit Ratings/Outlook were last updated on 9 November 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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