The credit rating of JSC Concern Kalashnikov (hereinafter, Kalashnikov, the Company, or the Concern) is based on its a- standalone creditworthiness assessment (SCA), which has been adjusted one notch upward to a due to its high strategic importance to the state. This provides additional support to the rating. The Company’s SCA is based on its strong market position as Kalashnikov is the leader in its segment. The average corporate governance assessment has a neutral impact on the Company’s rating. The Company’s operating risk profile is aa- due to a combination of factors. The assessment of the financial risk profile (bbb-) is a reflection of the Company’s medium size of business, very high profitability, and strong liquidity position. The financial risk profile assessment, and consequently the Company’s SCA, are constrained by the high leverage, medium debt service indicators, and weak free cash flow (FCF) assessment.
Kalashnikov is Russia’s largest manufacturer of firearms, the main supplier of small arms to the Russian Armed Forces, and controls the manufacture of high-precision guided weapons for army aviation. The Company is a successful example of transformation of a loss-making state-owned company into a promising multi-faceted holding thanks to private investors.
Key rating assessment factors
Strong business profile and market positions. The Company is the leader of the Russian firearms industry and an integral part of the entire firearms sector of Russia’s military industrial complex. The Concern produces more than 95% of small arms in Russia. The Concern’s product portfolio includes a wide range of military and civilian firearms, high-precision equipment, test vehicles, robotic products, and air cannons. New promising products of the Concern include military and civil ships, unmanned aerial systems, as well as equipping systems. Military small arms and high-precision guided weapons systems today form the basis of the Concern’s export potential, the share of which in the sales structure exceeded 50% in 2018. The share of exports declined in 2019 amid growth in supplies to the Russian market. The Company has a complete portfolio of orders for the forthcoming years, and its manufacturing capacities are highly loaded.
Average corporate governance is due to a high assessment of the management strategy as part of a public-private partnership, the implementation of which allowed the new owners of the Company to restructure OJSC Concern Izhmash that went bankrupt. The strategy is aimed further at sustained growth of revenues from sales of such promising products as UAVs, motorboats and boats. ACRA notes that there are virtually no financial risk management regulations in the Company, however, the actual level of accepted currency and interest risks is minimal. The Company’s structure is rather complicated but matches the scale of its business. Financial transparency is acceptable, taking into account the confidential nature of the Concern’s activities.
The very high level of profitability and medium size of business are underpinned by the current long-term state defense order contracts, military-technical cooperation, and the efforts of the Company’s management to reduce production costs. In 2019, the FFO margin before net interest and taxes declined slightly compared to the year before, however it remained at above 20%. Taking into account the fact that the Company’s strategy envisages increasing the profitability of production, ACRA expects the average FFO margin before net interest and taxes to amount to around 24% in the period from 2020 to 2024. The size of the Company’s business is assessed by ACRA as medium, as the annual average FFO before net interest and taxes is estimated at around RUB 8 bln for the period from 2017 to 2022.
High leverage and medium coverage. The ratio of total debt to FFO before net interest increased to 5.0x in 2019 vs 4.5x in 2018 amid a moderate increase in total debt and stable FFO. ACRA expects leverage to decline to 4.4x by the end of 2020 and to 3.8x by the end of 2021 as a result of higher operating cash flow. According to ACRA’s assessments, the weighted interest payment coverage ratio will amount to around 3.0x in 2017–2022.
The high liquidity of the Company stems from the comfortable terms of payment for its products. ACRA notes that the defense sector payment regulations imply strict targeted use of advance payments, therefore, not all cash was taken into account by ACRA in its calculations of liquidity. ACRA also notes a significant amount of unwithdrawn loan limits in banks and available credit lines. The weighted ratio of short-term liquidity in 2020–2022 is at a very high level — 2.4x. ACRA expects that in 2020–2021, the FCF will be positive in view of growth in operating cash flow and moderate capital expenditures compared to previous years.
Key assumptions
- Complete implementation of the current contract base in the forecast period;
- Reduced capital expenditures in the forecast period;
- No dividend payments in the forecast period.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- FCF margin above 2%;
- Stable leverage (ratio of total debt to FFO before net interest) within 3.5х–5.0x and simultaneous improvement of interest coverage to above 5.0x.
A negative rating action may be prompted by:
- Growth in total debt above 5.0х to FFO before net interest, or coverage of interest payments falling below 2.5х;
- FFO margin before fixed charges falling below 15%;
- Considerably smaller contract base;
- Substantially worsened access to external sources of liquidity and lower liquidity assessment.
Rating components
SCA: a-.
Support: SCA +1 notch.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, Methodology for Analyzing Member Company Relationships within Corporate Groups, Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of JSC Concern Kalashnikov was published by ACRA for the first time on August 16, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by JSC Concern Kalashnikov, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and JSC Concern Kalashnikov participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSC Concern Kalashnikov in its financial statements have been discovered.
ACRA provided no additional services to JSC Concern Kalashnikov. No conflicts of interest were discovered in the course of credit rating assignment.
