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Rating action

Scope Ratings GmbH (Scope) has affirmed the B+/Stable issuer rating of Hungarian pork processing company Kometa 99 Zrt. Scope has also affirmed the B+ 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: BB- (unchanged). The business risk profile remains indicative of Kometa’s moderate market position, resilient demand in its industry, concentration on domestic sales and pork products, and a low-margin business that is highly dependent on livestock prices. However, profitability is partly supported by the operational efficiency afforded by having all production processes in one facility. Moreover, Kometa’s EBITDA margin is stabilising due to the acquisition of pig breeder Triagro Kft. at the end of 2023, which enhances vertical integration.

Supporting factors to the business risk profile include a robust non-discretionary consumer goods and agribusiness sector, strong market positions in Hungary's fresh meat industry (third in total pork sales volumes and leading in modified atmosphere-packaged fresh meat), and greater operational cost savings than competitors due to centralized production processes. Furthermore, the vertically integrated business model, which now includes pig breeding, and a diverse product portfolio spanning both fresh and processed pork products contribute positively to the rating. The business risk profile is constrained by several factors: i) low profitability, which is heavily reliant on livestock prices and faces pressure from large international food retailers (especially discounters); ii) a focus on pork products with limited diversification into processed poultry; iii) small scale; iv) geographical concentration in Hungary (accounting for approximately 60% of sales); v) relatively weak brand value due to a reliance on private-label agreements for fresh meat; and vi) the tail risk associated with asset concentration in a single plant.

Scope-adjusted EBITDA* rose to HUF 3.5bn in 2023, up from HUF 3.0bn in 2022, although the EBITDA margin decreased slightly to 3.7% from 4.0%. This decline occurred because higher selling prices did not entirely offset the increases in pork prices and salaries. For the full year 2024, Scope predicts that EBITDA will be roughly HUF 5.3bn, with the EBITDA margin rising to over 5%. This improvement is attributed to a decrease in raw material costs, which, although still high, will more than offset further increases in labour costs. Additionally, the consolidation of Triagro will enhance profitability, as the pig breeding business benefited from high pork prices and generated an EBITDA margin above 15% over the past two years. Going forward, Scope sees EBITDA rising to HUF 6.0bn in 2026 thanks to volume growth also supported by the utilization of the new Triagro site in Csemő and moderate export growth. The EBITDA margin is expected to stabilise, given that Triagro’s pig breeding operations complement Kometa’s existing slaughtering business. Typically, fluctuations in pig prices affect the profitability of these two segments inversely.

Financial risk profile: B+ (unchanged). Kometa’s financial risk profile continues to reflect high leverage and weak cash flow cover, with the latter expected to deteriorate further due to the deployment of large project capex from 2024. These factors are only partly offset by a good EBITDA interest cover and a solid liquidity buffer.

EBITDA interest coverage was notably strong in 2023 due to an outstanding net interest income of HUF 0.7bn. Considerable interest income of HUF 1.8bn was derived from substantial liquid assets (primarily related to unused proceeds from the bond issued in 2022). These were temporarily parked in high-yield fixed-term deposits earning rates above the borrowing cost. Nonetheless, Kometa initiated its multi-year expansionary capex plan in 2024, targeting a substantial increase in the production capacity at its Kaposvar facility, primarily financed through existing cash reserves. The initial phase of this project focuses on enhancing logistic and slicing capacities and entails a total investment of approximately HUF 31bn by the end of 2026. Due to the combined effect of declining cash reserves and falling interest rates, interest is forecasted at roughly HUF 0.7bn in 2024, increasing to approximately HUF 1.1bn in 2025 and HUF 1.3bn in 2026. Consequently, EBITDA interest coverage is expected to decline to nearly 8x in 2024 and further weaken to around 5x in the medium term.

Debt/EBITDA was stable at 4.5x in 2023 (Scope applied a 45% netting of cash) with higher EBITDA compensating for the rise in debt. As in last year's review, Scope expects gross financial debt to rise by approximately HUF 5bn in 2024, reaching HUF 27bn and staying relatively stable thereafter. This should ensure that the debt/EBITDA ratio remains under 5.0x in the medium term (with the application of a lower cash netting of 25% from 2024 since cash is projected to be largely used up by 2026). Leverage is supported by funds from operations/debt, which is expected to range between 15% to 20% over time.

Due to low profitability and substantial working capital and capex needs, free operating cash flow/debt has generally been weak in the last few years, oscillating between slightly negative values and 5%. With the deployment of the large project capex from 2024, Scope predicts persisting largely negative free operating cash flow over 2024-2026. This assumes net capex ranging between HUF 5.0bn and HUF 10.5bn per year (capex acceleration in 2025) after deducting subsidies received (subsidies assumed at around 40% of the investment projects), compared to an average of HUF 2bn over the past three years. Cash outflows for 2024 also include around HUF 2bn for the acquisition of the remaining shares in subsidiary Kometa Italia (which was already 51% owned).

Liquidity: adequate (unchanged). Liquidity is adequate and supported by cash and equivalents of HUF 15bn as of June 2024 (versus HUF 17bn as of December 2023), a strong liquidity buffer against around HUF 3bn of short-term maturities in 2024 and HUF 7bn in 2025. Scope expects liquidity ratios to stay above 110% over the forecast period and that Kometa will remain in compliance with the financial covenants related to its senior secured debt. These include a net debt/EBITDA ratio of below 6x and a debt service coverage ratio above 1.25x.

Scope notes that Kometa’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 12bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (repayment within 15 days). Such a development could adversely affect the company’s liquidity profile. There is limited rating headroom as the senior unsecured bond is rated B+, the same level as the issuer rating. This means that a downgrade of the issuer rating or worsening recovery expectations, for example due to an increase in secured debt, may result in a downgrade of the bond, which would trigger the rating deterioration covenant.

Supplementary rating drivers: credit-neutral (unchanged). Scope expects Kometa’s financial policy to remain conservative. Management delayed capex in 2022 and 2023 to preserve liquidity and comply with its net leverage target of below 4x. The approach towards discretionary spending is also conservative: in recent years, management has only pursued a few small acquisitions of established business partners (e.g. Triagro) and has not been distributing dividends to founding shareholders. Parent support continues to be credit-neutral despite the presence of government-related entities, as these stakes are either temporary (the Hungarian development bank’s subsidiary MFB Invest owns 18%) or not large enough (the Municipality of Kaposvar’s 3.7%).

Outlook and rating sensitivities

The Stable Outlook reflects Scope's expectation that debt/EBITDA will remain below 5.0x despite the deployment of significant expansionary capex from 2024 onwards which will be primarily covered by existing cash reserves, with no significant cost overruns or delays expected. The Outlook assumes that EBITDA will remain above HUF 5bn per year and will show a less volatile pattern thanks to the recent consolidation of the subsidiary pig breeder Triagro Kft.

The upside scenarios for the ratings and Outlook are (collectively):

1. Debt/EBITDA improving to or below 3.5x on a sustained basis;
    
2. Recurring positive free operating cash flow/debt.

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

1. Debt/EBITDA deteriorating to above 5.0x on a sustained basis;

2. EBITDA interest cover weakening to below 4.0x.

Debt rating

Kometa’s HUF 12bn green bond issued in February 2022 (ISIN: HU0000361464) has a tenor of 10 years with 10% of its face value subject to amortisation in 2027, 10% yearly in 2028-2031 and the remaining 50% in 2032. The coupon is fixed at 5% and payable annually. The bond ranks senior unsecured.

Scope has affirmed the senior unsecured debt rating at B+, the same level as the issuer rating. This reflects an ‘average’ recovery in a hypothetical default scenario based on the liquidation value in 2026. Scope applied conservative recovery assumptions in view of the risk of additional secured debt entering the financing structure in case of a significant increase in capacity, as well the presence of real estate pledges for the subsidy providers (state-linked).

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Kometa 99 Zrt.

Issuer rating: B+/Stable, affirmed

Senior unsecured debt rating: B+, affirmed

*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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Consumer Products Rating Methodology, 31 October 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 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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Eugenio Piliego, Senior Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 December 2021. The Credit Ratings/Outlook were last updated on 13 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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