The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB-/Stable issuer rating on Hungarian baked goods manufacturer Zalaco Sütőipari Zrt. (Zalaco). Scope has also affirmed its senior unsecured debt rating at BB.

The rating affirmation also takes into account the correction of previous calculation errors in the financial metrics. The errors relate to the calculation of Scope-adjusted interest*, funds from operations, free operating cash flow (FOCF), EBITDA as well as operating leases payments adjustment. The errors were reviewed, and Scope concluded that the corrections had no impact on the ratings.

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). Zalaco’s business risk profile continues to be supported by strong profitability, (ahead of peers), a well-known regional brand and the robust industry environment for non-discretionary consumer products but constrained by limited product and geographical diversification as well as small market footprint.

In 2024 and 2025¹, Zalaco delivered steady and solid operating performance, with year‑on‑year revenue growth of 9.8% and 7.1%, respectively, while maintaining an EBITDA margin above 20% (a level significantly higher than peers, whose margins remain below 10%). This strong trajectory reflects the continued improvement in the company’s retail segment and the stable performance of its high‑margin frozen bakery products division. These positive developments were partially offset by a year‑on‑year decline in fresh product sales. Management highlights that operations are currently running close to full capacity; however, the retail segment is still expected to offer additional growth potential of approximately 10%–15% in 2026.

Furthermore, EBITDA growth and its maintenance at approximately HUF 6bn (HUF 5.9bn in 2024) were supported by improvements in Zalaco’s cost structure, particularly in utilities and key raw materials such as flour and margarine, alongside effective pricing actions. Scope expects EBITDA margin to remain in the 20–22% range in the near term, largely because the company is operating close to maximum capacity and has limited ability to expand production in the short run. As a result, profitability will depend on pricing dynamics for finished goods (closely tied to Hungary’s inflation outlook) and on fluctuations in raw material costs, which continue to be influenced by agricultural commodity trends and broader global supply‑chain conditions.

The company's sales are heavily concentrated on the international retail chain Lidl, which contributed to over 50% of total sales in the past four years. This share is expected to remain high in the medium term, as Lidl is the primary customer and partner for frozen product sales. However, the risk associated with this sales concentration is partially offset by Zalaco's ability, as a small-cap company, to consistently deliver quality-focused products and sustain its business operations effectively.

Financial risk profile: BBB- (unchanged). Zalaco's good financial risk profile remains stronger than its business risk profile and supports the overall issuer rating. The company’s sound growth sustained strong credit metrics in 2024 and 2025. Leverage, as measured by debt/EBITDA (excluding cash netting), decreased to 1.0x in 2024 (vs 1.2x in 2023) and was kept flat in 2025; similarly, funds from operations/debt approached 100% in 2025 due to solid EBITDA growth in absolute terms while indebtedness remained moderate. Scope highlights that Zalaco could repay all its debt with the cash available on its balance sheet.

Going forward, Scope anticipates leverage to slightly increase to 1.2x as EBITDA growth is projected to be pressured by rising in operational costs and debt to slightly increase to support the financing of the manufacturing facility. The company plans to invest in a greenfield (5 hectares) nearby the existing plant in Zalaegerszeg and subsequently in a new manufacturing facility to support production and potentially support capacity expansion.

Scope’s leverage assessment does not include the netting of cash, as the high cash balance is expected to be partly utilised rather than serving solely as a liquidity buffer.

Scope expects Zalaco to generate positive net cash interest throughout the projected period due to its substantial cash buffer. Although interest payments are expected to rise in the assumption of a new debt issued to finance the new factory at a higher effective interest rate, the interest income from the company’s robust cash balances should more than offset interest payments. Moreover, the agency expects Zalaco to continue generating positive FOCF thanks to disciplined capex; however, in the near-term, a lower magnitude (approximately HUF 2bn in 2026-2028 vs approximately HUF 4bn in 2025) due to the upcoming investment-heavy cycle. Scope does not expect any M&As and dividend payments to be sufficiently covered by FOCF generation in 2026-2028.

Liquidity: adequate (unchanged). Zalaco’s liquidity remains adequate. This is mainly driven by a limited short-term debt position and sound EBITDA cash conversion. While the expected increase in maintenance and development capex in upcoming years will pressure FOCF generation, the company’s significant cash buffer remains substantial to fully cover financing and refinancing needs.

Zalaco’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 4.4bn) 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 three notches. Scope therefore 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. Scope assesses the company’s financial policy, including its M&A strategy and dividend payments (capped at 25% of previous year’s net income, in line with bond prospectus) as credit neutral.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that Zalaco will sustain organic revenue growth yielding to profitability margins around 20% and debt/EBITDA ratio of around 1.0x in the near-term. The Outlook takes into consideration possible investments in capacity expansion and elevated capex in the next three years.

The upside scenario for the ratings and Outlook is:

1.    Overall improvement of the company’s BRP due to improved diversification and/or significantly increased scale (deemed remote)

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

1. Debt/EBITDA at around 3.0x
    
2. EBITDA margin deteriorating to or below 15%

Debt rating

Scope has affirmed the senior unsecured debt rating at BB, which also pertains to the HUF 4.4bn bond (ISIN: HU0000359765).

The rating is based on a hypothetical liquidation scenario as of end-2028, in which Scope computed an ‘excellent’ recovery for holders of senior unsecured debt based on its assumptions of attainable liquidation values. Although the recovery analysis indicates a relatively high recovery rate for senior unsecured debt, Scope has limited the rating uplift for the debt category to one notch due to i) the unsecured nature of the debt, ii) Zalaco’s small scale and the uncertainties around the setup of the company at the time of a default, and iii) the risk that the company could raise higher-ranking debt, which would dilute the recovery for senior unsecured debt holders.

Environmental, social and governance (ESG) factors

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

It is worth noting, however, that costs of production waste continue to generate a reduction in gross margins (approximately 5%). This factor did not result in a rating adjustment under supplementary rating drivers, but it is considered in Scope’s assessment of the company’s operating profitability and its overall blending in Zalaco’s competitive positioning.

All rating actions and rated entities

Zalaco Sütőipari Zrt.

Issuer rating: BB-/Stable, affirmation

Senior unsecured debt rating: BB, affirmation

1. Preliminary results

*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, (Consumer Products Rating Methodology, 31 October 2025; General Corporate Rating Methodology, 14 February 2025), are available on 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 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 scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at 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 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: the Rated Entity, public domain 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: Lucas Nathan Pozza Pessoa, Senior Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 24 April 2020. The Credit Ratings/Outlook were last updated on 4 February 2025.

Potential conflicts
See 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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