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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating of Vöröskő Ltd. Scope has also affirmed the BB senior unsecured debt rating of Vöröskő Ltd.

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 benefits from the issuer’s strong positioning in the Hungarian market but is constrained by its small size compared to international peers and lack of geographical diversification.

With revenues of HUF 92bn in FY2024, Vöröskő is the second largest consumer electronics retailer in Hungary, behind Ceconomy (BBB-/Stable). Scope considers the issuer's market share of around 15% to be well protected from competition, underpinned by: i) the issuer's strong position as a retailer of home improvement products (mainly small and large household appliances); ii) the issuer's ambition to develop its product range and capitalise on its recent acquisition of private label manufacturer Dyras Ltd and; iii) the issuer's membership of Euronics International Ltd. (Europe's largest consumer electronics buying group), which provides brand recognition and price power.

Vöröskő’s business risk profile is limited by its lack of geographic diversification, as its operations are focused exclusively on Hungary, exposing it to potential revenue volatility. This is unlikely to change in the near future, as although the issuer has plans to expand abroad, the contribution is likely to be limited in the medium term.

Product diversification is considered to be good. Vöröskő offers a wide range of products in the household appliances and consumer electronics segments. Going forward, Scope expects Vöröskő to continue to offer a diversified product range, supported by its high warehouse capacity.

The business risk profile is also supported by the good online presence, 11% of sales in FY2024, which helps the company to maintain its market share against large international competitors.

In recent years, the issuer has managed to maintain stable profitability and stable Scope-adjusted EBITDA*, amidst a macroeconomic downturn. Scope believes that the resilient results are driven by: i) Vöröskő's recent improvement of its bricks-and-mortar strategy to increase customer loyalty through better availability of popular goods, emphasis on loyalty cards (which allow it to anticipate consumer needs) and financing services and; ii) five new stores opening in 2024. The EBITDA margin, at around 6% in FY 2024, is expected to remain stable in Scope's forecast, supported by a recovery in sales after two years of stagnant demand and a potential increase in gross margins thanks to the issuer's strategy of converting volume bonuses into price discounts with certain suppliers.

Financial risk profile: BB+ (unchanged). The financial risk profile benefits from robust credit metrics and strong liquidity.

The leverage, measured by the debt/EBITDA, has been constantly below 3x owing to strong cash generation. Scope expects leverage to sustain around or below 2x in the medium term, underpinned by the stable level of debt, with HUF 2.8bn still available on the issued bond to finance potential developments.

The financial risk profile also benefits from strong debt protection, measured by the EBITDA interest cover, which despite the bond issuance in 2022 remained above 10x and surged to 27.1x in 2024, driven by the favourable interest rates on Hungarian cash deposits. In Scope’s rating case, accounting for lower interest on cash deposits, the ratio is anticipated to range between 9x and 10x, supported by the fixed rate on bank debt and the assumption that the issuer will not take any new debt.

Scope’s assessment of the financial risk profile also takes into account the historical cash flow cover volatility, pressured by high capex and working capital swings. While the FY 2023 was an outlier as significant cash flow was driven by the Company strategy to sharply reduce inventory, the cash flow cover decreased to around 14% in FY 2024. Scope expects the ratio to range between 5% and 15% as lower capex will be partially offset by increasing inventory levels due to the issuer's strategy to return to building inventory to focus on increasing market share.

Liquidity: adequate (unchanged). Liquidity is adequate given the absence of short-term obligations in the near term (the bond will start amortizing in 2027 at a 10% rate) and significant cash available (HUF 6.2bn as of June 2024). The liquidity is additionally supported by HUF 5.3bn unused overdraft credit line expiring in 2027.

Vöröskő senior unsecured bonds issued under the Hungarian National Bank’s Bond Funding for Growth Scheme have a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 7bn) if the debt rating of the bonds stays below B for more than two years (grace period) or drops below B- (repayment within 90 days). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is 3 notches. Scope sees no significant risk of the rating-related covenant being triggered.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope's expectation that Vorosko will maintain leverage at a level of 2x or below, supported by recovering market demand, driving strong EBITDA generation. The Outlook assumes that gross debt will remain stable as the issuer has no additional financing needs given its strong cash position.

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

1. Improved business risk profile with a significant growth in size and geographic reach. A scenario which is considered remote at present.
    
2. Debt/EBITDA sustained below 3x.

The downside scenario for the rating and Outlook is:

1. Debt/EBITDA moving towards 4x.

Debt rating

Scope affirms the BB rating of Vöröskő’s senior unsecured debt. The assessment considers a hypothetical default scenario in 2027 and is based on the ongoing concern. The HUF 6bn enterprise value that is available to creditors compares to HUF 5.3 credit line (assumed to be fully overdrawn) and HUF 7bn senior unsecured bond and results in an average recovery of 50%.

In January 2022, Vöröskő issued a HUF 7bn senior unsecured bond (ISIN: HU0000361241) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for HUF 4.2bn for purchasing, opening and renovation of warehouses and stores. The bond has a tenor of 10 years and a fixed coupon of 4.75%. Bond repayment is in six tranches starting from 2027, with 10% of the face value payable yearly, and 50% balloon payment at maturity.

Environmental, social and governance (ESG) factors

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

All rating actions and rated entities

Vöröskő Ltd.

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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Retail and Wholesale Rating Methodology, 26 April 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 13 January 2022. The Credit Ratings/Outlook were last updated on 15 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, 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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