The credit rating of Trud JSC (hereinafter, Trud, or the Company) is based on the Company's very strong business profile and stable market positions driven by the Company's vast experience in implementation of government contracts and its capabilities to successfully bid in road construction tenders.
Thanks to its medium-diversified operations, the Company's business model is subject to moderate risks, which enables it fulfilling federal and regional contracts for constructing and servicing roads and other infrastructure facilities awarded by government agencies.
The rating is restricted by the Company’s financial profile, which is characterized by the low score for business size (as per ACRA's methodology), high leverage and low profitability indicators in comparison with industry peers, as well as weak cash flow.
ACRA notes that, according to the Agency's classification, the infrastructure construction industry to which the Company belongs is a high-risk industry, which puts significant pressure of the credit rating. At the same time, in ACRA's opinion, road construction is the least risky segment in the industry. In addition, the industry risk is mitigated to some extent by the Company's long history of success in managing comparable contracts.
The Company has subsidiaries operating in the agricultural business (Sayansky Broiler LLC and Kuytunskaya Niva JSC). In its analysis of financial metrics, ACRA used the Company's financial statements that exclude subsidiaries, because these businesses are segregated and have a comparable level of credit quality.
Trud is a road construction company, one of the general contractors for Rosavtodor and Rosaviatsia. The Company's branches operate in six regions of Russia (Sakhalin, Amur, Irkutsk and Moscow Regions, Zabaykalsky Krai, and the Republic of Buryatia). 74.47% of shares are owned by L. B. Ten, 25% are owned in equal shares by E. Yu. Ten and I. Yu. Trachuk.
Key rating assessment factors
Very strong business profile and medium geographic diversification. The Company mostly focuses on the implementation of government contracts for construction of road facilities. This type of infrastructure construction activities (paved roads), in ACRA’s opinion, has a low complexity profile. The Company has accumulated a great expertise and its contract portfolio covers 100% of its output capacity until 2023, which is the reason for the 'high' assessment score for the contract base quality. At the same time, ACRA points to the large customer concentration risk (the Federal Road Agency (Rosavtodor) accounted for 90% of the Company's total revenue in 2020). The Company's dependence on subcontractors is low. Subcontractors are engaged mainly to meet the requirements of industry legislation: the share of work subcontracted in 2020 amounted to 22% of the total volume of construction and installation work. The main advantages of the Company's business model are the branch structure of its operations in the regions of presence, its own production facilities for asphalt concrete mixtures, crushed stone, etc., a sufficiently strong experience in the implementation of large infrastructure projects, and the ownership of licensed quarries in the regions of presence.
The Company's geography of operations covers six Russian regions in East Siberia and Far East.
High leverage and low debt coverage. According to ACRA's forecasts, changes in the Company's leverage and coverage metrics will be insignificant over the next two to three years: in 2021, the ratio of total debt to FFO before net interest payments may decrease to 5.0x (5.6x in 2020), and in 2022–2023, the average annual value of this ratio is expected to be about 4.7x.
The ratio of total debt to capital is expected at 1.95x in 2021 (the same as at the end of 2020). The average value of this ratio in 2022–2023 may decrease to 1.5x. The expected partial decrease in debt in the forecast period (2021–2023) is due to the planned repayment of current debt in line with the repayment schedule.
In addition, FFO before net interest is expected to grow by 2023 due to an inflow of contractual funds.
As of June 30, 2021, about 90% of the Company's debt was represented by bank loans.
According to ACRA estimates, in 2021 the ratio of FFO before net interest to interest will be 1.78x (2.09x in 2020); in 2022, the ratio is expected to decrease slightly to 1.61x (the bulk of loan repayments falls on these periods); in 2023, the ratio is expected to grow moderately to 2.38x.
Moderate liquidity and weak cash flow. The Company has maintained its liquidity by undrawn committed credit lines. The debt repayment schedule is smooth for the next three years. ACRA expects the Company's short-term liquidity ratio to be 1.3x at the end of 2021. The sources of the Company's liquidity are quite well diversified: the Company borrows funds from various banks, including Bank VTB (PJSC), Sberbank, PJSC Sovcombank, etc., and issues public debt as well. ACRA expects that in 2021–2023, the average annual free cash flow (FCF) of the Company will be positive due to cash inflow under current contracts, and the average FCF margin will be about 3%. At the end of 2020, the FCF margin was negative (-13%) due to the significant expenses (over RUB 400 mln) incurred by the Company to replenish its fixed assets in the corresponding period. In the forecast period, the Company plans to acquire fixed assets on lease, which was taken into account by ACRA when modeling the Company's cash flows.
Low business size and low profitability. According to ACRA estimates, the average FFO before net interest payments and taxes in the period from 2021 to 2023 will be about RUB 680 mln. The indicator is comparable to the values for the period from 2019 to 2021, which indicates its stability. The Company's profitability (FFO margin before interest and taxes) is low and amounted to 6% at the end of 2020. ACRA expects this indicator to remain at this level until 2023.
Corporate governance matches the scope of the Company's business. The Company has a long-term development program until 2024. The Company's strategy is conservative and provides for maintaining its positions in the regions of presence, as well as expanding the range of customers, contracts and regions (including through participation in the national project "Safe and High-Quality Roads"). One of the main strategic objectives is to increase production efficiency, including by increasing labor productivity through lean manufacturing projects and programs. The ultimate beneficiary takes a significant part in the management of the Company. There is a moderate exposure to foreign exchange risks and a high level of interest rate risk since 100% of the debt is raised on a floating rate basis.
ACRA notes that the Company's ownership structure is somewhat encumbered with subsidiaries carrying out non-core businesses. On the other hand, there are no intra-group cash flows between the Company and its subsidiaries, and the Company does not issue guarantees for any loans granted to subsidiaries.
The Company prepares its audited IFRS financial statements annually, but its quarterly consolidated statements are made in compliance with the Russian Accounting Standards.
- Fulfilling all existing contracts and maintaining the size of contract portfolio at the current level in 2022–2023;
- Annual growth in prime costs corresponding to that of revenue;
- No transactions between the Company and its subsidiaries;
- Timely performance of all obligations under each contract.
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:
- FFO before net interest and taxes going below 3.0x;
- Return on FFO before net interest and taxes going up to 16%.
A negative rating action may be prompted by:
- A decline in interest coverage and return on FFO before interest and taxes below 6%;
- An increase in the volume of related-party transactions;
- A significant deterioration in the access to external sources of liquidity.
Standalone creditworthiness assessment (SCA): bb.
No outstanding issues have been rated.
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 Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to Trud JSC 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 Trud JSC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Trud JSC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Trud JSC. No conflicts of interest were discovered in the course of credit rating assignment.