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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Stable issuer rating on Hungarian construction company ENSI Kft. 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

The affirmation of the issuer rating at B+/Stable is supported by an improved financial risk profile, which has led to an improvement in the standalone credit assessment of the company, but held back by the company’s still limited scope and outreach. ENSI has reported stable operating profitability and good credit metrics in both the year-end 2023 and October 2024 financial statements (EBITDA* margin close to 8%). The issuer's business model has become more resilient to the economic headwinds in the domestic construction market, benefiting from: i) a strong market position in the niche segment of mechanical engineering; ii) a long list of references and high level of expertise in the field; and iii) a long-term strategic partnership with key general contractors. This resilience is also reflected in the order book (around HUF 28bn as of November 2024), which has remained close to the average of the last three years (around HUF 30bn) despite the generally lower demand in the segment.

While Scope has raised the company’s standalone credit assessment to BB-, the issuer rating has been constrained at B+, reflecting peer group considerations. Scope highlights the inherent risks related to ENSI’s niche activity, highly concentrated geographical scope and client portfolio. A further deterioration in the business environment, such as a weaker order book due to sluggish domestic demand or the loss of a key client, could lead to a rapid deterioration in the issuer's credit profile. These risks are reflected in a negative one-notch adjustment of the standalone credit assessment of BB-, as the issuer’s limited size and outreach compared to other entities rated in the BB rating category hinder its credit quality.

Business risk profile: B (unchanged). The business risk profile is supported by ENSI’s operating profitability and leading market position in a niche segment of the construction industry. It is constrained by the company’s limited absolute size and weak diversification.

Revenues have been characterised by significant volatility in the past five years, impacted by the strongly pro-cyclical nature of the construction sector. ENSI’s market position in the niche market of mechanical engineering (heating, cooling, ventilation, hot water, lighting) remains strong. On a broader scale, however, the issuer’s market share is still weak, constrained by its relatively small absolute size in a global and European context. Diversification also remains weak, with business activities fully focussed on the Hungarian market and a very concentrated customer portfolio (the top five customers represented 96% of revenue in 2023). This makes the company more vulnerable to macroeconomic shocks and reduces its ability to mitigate economic cycles.

In 2023, the EBITDA margin remained consistent with the previous year's results, demonstrating resilience in the face of challenging market conditions. Based on interim financial information, the EBITDA margin for 2024 is forecasted to be in a similar range (7.2%). Going forward, Scope anticipates a gradual decline in profitability below 7%, based on: i) softening demand from the end-market side due to negative macroeconomic conditions; and ii) still strong inflationary pressure from the cost side. Scope highlights the limited medium-term visibility on cash generation, as the order book usually entails only the next year (project duration usually less than 12 months).

Financial risk profile: BBB+ (revised from BB+). The financial risk profile continues to provide support to the rating, benefitting from a low level of financial debt, positive net interest, and strong free operating cash flow (FOCF) generation.

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 that leverage, measured by the debt/EBITDA ratio, will be between 3x-4x in the coming years. As bond amortisation does not start until 2027, deleveraging is highly dependent on ENSI’s ability to protect and improve its margins. Scope anticipates that interest coverage will remain strong, given that cash interest income is expected to exceed cash interest paid in the rating agency's forecast. The interest-bearing liability (bond issued under the MNB bond funding for growth scheme) has a fixed coupon rate of 4.75%. The bond proceeds that have not yet been utilised are placed in short-term deposits, yielding interest income (assumed at 5% in 2024 and 4% in 2025 and 2026).

Historically, ENSI has been able to generate positive FOCF, with fluctuations due to temporary spikes at year-end for increased working capital needs. Based on the current backlog, Scope expects positive cash generation to continue in the medium term, with FOCF/debt above 40% until 2026.

Liquidity: Adequate (unchanged). Liquidity is assessed as adequate as sources in Scope’s liquidity forecast for 2025 fully cover uses (the company has no short-term debt as at YE 2024). Sources comprise HUF 7.0bn of unrestricted cash available forecasted as at YE 2024 and FOCF of HUF 2.4bn forecasted for 2025. Scope believes a worsening of liquidity, e.g. due to delayed customer payments or cost overruns, is unlikely at this time thanks to the significant cash balance available to the company.

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. Scope notes that the company must at least maintain its current credit profile to avoid triggering the rating-related covenant. Considering the improved financial risk profile and good credit metrics, Scope regards the risk of breaching the rating-related covenant as limited.

Supplementary rating drivers: -1 notch (revised from credit neutral). The B+ issuer rating incorporates a negative one-notch adjustment for peer context. The issuer’s limited size and weak diversification in terms of activity, geographical outreach and customer portfolio constrains its credit profile to the B rating category compared to relevant peers in the BB category.

Outlook and rating sensitivities

The Outlook is Stable. This incorporates Scope’s assumption that ENSI’s credit metrics will remain mainly unaffected by the worsening performance of the construction segment, staying at their current level, with debt/EBITDA consistently below 4.0x, positive net interest, and FOCF/debt above 40%. Scope's financial forecast includes two acquisitions, the first for HUF 2.0bn occurring in 2025 and the second for HUF 1.0bn in 2026.

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

1. Improving business risk profile, via an improved market position, diversification of stronger visibility on cash flows from a more substantial order backlog, paired with maintained credit metrics
    
2. Removal of the negative rating adjustment for peer group wile at least maintaining its current financial risk profile

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA sustained above 4.0x

Debt rating

ENSI issued a HUF 5.5bn senior unsecured bond (ISIN: HU0000361258) in January 2022 through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds are currently unused but earmarked for M&A, in line with the company’s strategy to enter related segments and achieve synergies and economies of scale. The bond has a tenor of 10 years and a fixed coupon of 4.75%. Bond repayment is in six tranches; 10% of the face value is payable each year between 2027 and 2031, and 50% at maturity in 2032.

Scope has affirmed ENSI’s senior unsecured debt rating at B+, the same level as the issuer rating. The recovery analysis is based on a hypothetical default scenario at year-end 2026. Scope used the going concern scenario in its analysis due to the asset-light nature of the company and the assumption that its business activity generates its enterprise value. Recovery is ‘average’ for the holders of senior unsecured debt in this scenario.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

ENSI Kft.

Issuer rating: B+/Stable, affirmation

Senior unsecured debt rating: B+, 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, (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 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/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: Istvan Braun, Senior Representative
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 17 January 2022. The Credit Ratings/Outlook were last updated on 19 January 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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