The credit rating assigned to «SEAP named after Sergo Ordzhonikidze», PJSC (hereinafter, the Company) is based on the Company’s small size (absolute FFO before net interest payments and taxes is less than RUB 500 mln), weak geographical diversification in terms of sales markets, and average corporate governance, in which the Company’s financial transparency was assessed as low. However, ACRA notes the Company’s strong business profile, which is based on stable revenue via implementation of the state defense order, as well as moderate cyclicity, market saturation, and a high degree of vertical integration.

Very high profitability and high coverage have a positive impact on the financial risk profile. The Company’s average leverage assessment has no impact on the rating. However, low cash flow estimates due to increased capital expenditures in coming years and weak liquidity limit the rating.

The Company is a small enterprise in the electronic appliance manufacturing industry. The Company’s main area of operations is producing aviation and special armored ground equipment, telecommunications products, as well as low-tonnage chemical products. The company is owned by a group of private shareholders.

Key rating assessment factors

The Company’s strong business profile assessment is based on stable financial indicators, which are the results of a contract base as part of the state defense order. This, in turn, causes moderate cyclicity in sales markets for the Company’s main products. The business profile is benefited by a high degree of vertical integration, which ensures control over the entire production chain and low dependence on subcontracting and components.

The Company’s average market position and low sales market diversification are the result of the Company being a competitive player in a fragmented market in several product categories. However, the products are supplied exclusively to the Russian market, which is nevertheless sufficiently diversified for the Company’s products.

The average corporate governance assessment reflects average assessments (for the Russian corporate segment) of corporate governance sub-factors like management strategy, risk management system, and management structure. For all of these sub-factors, the Company has approved procedures and defined the authorities responsible for decision-making. Given the concentration of shareholder capital in the hands of a group of private shareholders, the Company is managed and key decisions are made by the shareholders. As a result, the Board of Directors performs rather a nominal function in approving decisions. ACRA assesses the group structure sub-factor as high based on its simplicity and lack of transactions with related parties. The low assessment of the financial transparency sub-factor is due to the lack of reporting on international standards with explanations and comments.

The financial risk profile assessment at bb+, on the one hand, is based on the small size of the business, which is the main limiting factor for the Company’s rating. On the other hand, the Company’s very high profitability (the weighted ratio of FFO before interest payments and taxes to revenue for 2017−2022 should be about 22%) and high debt service coverage (the weighted ratio of FFO before net interest payments to interest payments for 2017−2022 should be 5.1x) are the main positive factors in assessing the Company’s financial risk profile and ultimately its rating.

Average leverage assessment. The Company’s total debt to FFO before net interest payments rose to 2.3x in 2019 from 1.6x in 2018. ACRA expects this figure to increase to 2.9x in 2020−2021 due to the need to finance an increased capital expenditure program aimed at diversifying and expanding the product range.

Very weak cash flow and weak liquidity. Due to the growth of the investment program in 2021−2022, free cash flow (FCF) will be negative and require an increase in debt financing. ACRA expects that by 2023, as it passes the peak of the investment program, the Company’s FCF will turn positive and be aimed at reducing leverage. The Company’s liquidity is low due to the limited amount of undrawn credit lines and the low amount of cash on accounts. Combined with a significant amount of repayments and an increase in the investment program, this creates a liquidity risk, especially in 2021−2022.

Key assumptions

  • Implementation of the Company’s revenue and operating cash flow plan for 2020−2022;
  • Total volume of capital investments in 2020–2022 in line with the approved business plan;
  • Average return on FFO before interest payments and taxes at 19% in the forecast period;
  • No annual dividend payments until 2023. 

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:

  • Maintaining the average weighted ratio of total debt to FFO before net interest payments below 3.5x;
  • Increase in short-term liquidity by reducing the volume of short-term financing, improving working conditions and expanding the list of counterparty banks, which will contribute to the growth of the short-term liquidity ratio above 1.0x;
  • Positive FCF.

A negative rating action may be prompted by:

  • Reduction in the short-term liquidity ratio below 0.8x;
  • Increase in total debt to FFO before net interest payments above 5.0x;
  • Significantly reduced access to external sources of liquidity.

Rating components

SCA: bbb-.

Adjustments: none.

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 and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating has been assigned to «SEAP named after Sergo Ordzhonikidze», PJSC for the first time. 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 «SEAP named after Sergo Ordzhonikidze», PJSC, information from publicly available sources, as well as ACRA’s own databases. The credit rating was assigned based on the RAS financial statements of «SEAP named after Sergo Ordzhonikidze», PJSC. The credit rating is solicited, and «SEAP named after Sergo Ordzhonikidze», PJSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by «SEAP named after Sergo Ordzhonikidze», PJSC in its financial statements have been discovered.

ACRA provided no additional services to «SEAP named after Sergo Ordzhonikidze», PJSC. No conflicts of interest were discovered in the course of credit rating assignment.

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