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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB-/Stable issuer rating on Finnish growing media company Neova Oy as well as the BBB- senior unsecured debt rating and the S-2 short-term debt rating.

The affirmation of the BBB- issuer rating is based on Neova’s still moderate business risk and financial risk profiles (both assessed at BB+), coupled with the group’s status as a government-related entity which provides a one-notch uplift to the standalone credit assessment. The Stable Outlook reflects Scope’s expectation that credit metrics will remain relatively stable over the next few years, and that the group’s ownership structure and role in the Finnish energy environment will not change.

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). Neova’s business risk profile continues to be supported by its solid competitive position as a leading international player in the growing media sector (i.e. substrates, mulches and organic fertilisers), particularly in Europe, where the group is the market leader through its subsidiary Kekkilä-BVB. Its products, including horticultural peat and other substrates, are essential for local, clean and green food production as they are a more sustainable and environmentally friendly alternative to traditional chemical fertilisers (positive ESG factor). In addition, regarding its fuels business, Neova remains the leader in Finland with a market share of around 60%-70% for both energy peat and pellets, although exposure to such a highly polluting fossil fuels carries some regulatory, environmental and political risks (negative ESG factor). However, these risks are considered to be limited due to the planned ramp-down of this business in the medium term.

Neova has a moderate degree of geographical diversification. Although it operates in more than 100 countries, its home market is still dominant (around 30% of revenue) and Europe generates almost 90% of sales. However, this concentration risk is mitigated by the highly fragmented base of professional (B2B) and retail (B2C) customers.

Profitability remains the weakest driver of Neova’s business risk profile, with a Scope-adjusted EBITDA margin* averaging around 10% in recent years, which is comparatively low for a chemicals company. In 2023, the EBITDA margin was weak at 9.7%, still impacted by lower sales amid a general decline in demand in the growing media market, coupled with higher freight and material costs. However, profitability is expected to recover already in 2024, as shown in the September interim results, and to remain solidly above 10% in the coming years. This will be driven by lower fixed costs, an expected return to more favourable macroeconomic and market conditions (i.e. declining inflation and interest rates), a decreasing weight of low-profit energy peat and an increasing contribution from the high-profit real estate business on renewables.

Financial risk profile: BB+ (unchanged). Despite the temporary deterioration in credit metrics in 2022 and 2023, Neova’s financial risk profile still shows a moderate and balanced financial structure, with leverage as measured by debt/EBITDA expected to return to below 3.0x from 2024 onwards.

Indeed, based on the September interim results, Scope expects debt to decrease significantly at YE 2024 by around EUR 30m compared to YE 2023, due to a robust free operating cash flow and low dividend payments (EUR 4.0m). Given also the expected EBITDA growth, the agency forecasts leverage to improve to 2.6x at YE 2024 (vs 3.4x at YE 2023). While Scope projects internal financing capacity to remain relatively weak due to rising capex, Scope believes that Neova will manage to keep leverage below 3.0x over the next two years, benefiting from increasing margins.

At the same time, debt protection remains credit-supportive for Neova, despite its temporary deterioration in 2023, when the weaker margin caused the EBITDA interest cover to fall to 4.4x. In 2024, the expected recovery in EBITDA should bring the interest cover back to the 2022 level, above 5.0x. For 2025 and 2026, the expected reduction in net interest paid resulting from the decrease of gross financial debt, coupled with the estimated growth in margins, could further support debt protection, leading to an interest cover ratio gradually approaching 7.0x.

Liquidity: adequate. Neova’s liquidity profile is solid. This is evidenced by the liquidity ratio of well over 110% in 2023, which Scope expects to remain at this level from 2024 onwards, benefiting from lower short-term debt compared to the recent past, coupled with high cash availability (around EUR 90m forecasted at YE 2024) and an adequate amount of committed unused bank facilities (EUR 75m).

Supplementary rating drivers: +1 notch. Neova’s credit-neutral financial policy is prudent and sensible overall. The group’s commitment to maintaining a solid financial structure is confirmed by its optimisation of operating costs and revision of its investment plan and M&A with a view to greater caution.

Scope defines Neova as a government-related entity in accordance with Scope’s Government Related Entities Rating Methodology, based on the public ownership (Finnish state owns 50.1% of shares) and the public importance of certain services provided in Finland by the group, signalled by its status as a company of strategic interest for the state. Based on the high capacity and medium willingness of the Finnish authorities to provide financial support if needed, Scope has applied a one-notch uplift to the standalone credit assessment. The upnotching is limited to one notch, taking into account that Neova is not 100% directly owned by the government (but also indirectly by municipalities/communities) and that an important portion of its activities is outside of Finland.

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that Neova’s credit metrics will improve solidly over the next few years, with FFO/debt developing within a range of 25-30% despite weak cash flow cover (free operating cash flow/debt around breakeven). This is supported by Scope’s assumption that the company’s EBITDA margin will be retained above 10%. The Outlook is also based on Scope’s view that the Finnish state will continue to have a strategic interest in Neova due to the group’s ownership structure and its role in the energy environment in Finland.

The upside scenario for the rating and Outlook is:

• a stronger balance sheet, e.g. FFO/debt improving to above 35% on a sustained basis, supported by an improvement of cash flow cover (i.e. free operating cash flow/debt above 5%).

The downside scenarios for the rating and Outlook are (individually or collectively):

• a sustained deterioration in the company’s financial risk profile, as indicated by a FFO/debt deteriorating to below 25% on a sustained basis, paired with a further weakening of cash flow cover (i.e. negative free operating cash flow/debt);
   
• any change that negatively affects Scope’s view of Neova’s GRE status as a company of strategic interest and thereby its potential for support from public authorities.

Debt rating

Scope has affirmed the BBB- senior unsecured debt rating, the same level as the issuer rating.

Neova regularly uses Commercial Paper, under a Euro Commercial Paper programme with a maximum of EUR 150m (fully undrawn as of November 2024). The programme is usually renewed every year on a rolling basis as it provides useful and cheap resources for working capital requirements and treasury optimisation. Based on the underlying BBB-/Stable issuer rating and the solid liquidity profile, coupled with good access to external funding from banks, the capital market and other funding channels, the short-term debt rating is affirmed at S-2.

Environmental, social and governance (ESG) factors

Neova’s strong commitment to ESG goals has been demonstrated through its results and strategies. The company aims to contribute to the transition to a sustainable economic system through all its businesses. In the food supply chain, Neova’s substrates provide a more sustainable and greener alternative to traditional chemical fertilisers that pollute the environment. At the same time, the group is exploiting Finland’s abundant land by developing renewable energy plants (i.e. wind and solar), thus actively contributing to Finland’s clean energy transition. Neova's new businesses include the production of activated carbon, an important resource for both air and water purification, as well as bio-stimulants and other innovations to increase the sustainability of food production and promote the circular economy.

As peat used for energy production is a fossil fuel responsible for significant carbon emissions and is to be phased out in Finland in the long term, the group decided to divest this business from 2017. However, the energy crisis in 2022 forced Neova to maintain part of this activity and postpone its termination. Overall, the potential regulatory, environmental and political risks are limited, given the company’s current declining exposure for the planned ramp-down in the medium term.

All rating actions and rated entities

Neova Oy

Issuer rating: BBB-/Stable, affirmation

Senior unsecured debt rating: BBB-, affirmation

Short-term debt rating: S-2, 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; Government Related Entities Rating Methodology, 10 December 2024; Chemicals Rating Methodology, 16 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/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: Marco Romeo, Associate Director 
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 22 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
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.