The credit rating of United Machinery Group LLC (hereinafter, the Group, the Company, or UMG) is based on the strong market position, and the average assessment of the Company's business profile, geographical diversification and corporate governance. The financial risk profile assessment is based on the medium size of the Company, high profitability, strong liquidity and high coverage. The rating is constrained by the average leverage and weak cash flow.
UMG is one of the largest manufacturers of heavy-duty, road-building equipment and power units in Russia. The structure of the group includes two main sub-holdings — United Machinery Group LLC and Machinery Group LLC. The first includes companies that are involved in the production of cargo vehicles (Automobile Plant URAL, the largest enterprise in Russia specializing in the production of off-road trucks) and power units (Autodiesel PJSC (YMZ) — the leading manufacturer and supplier of diesel engines and power units with linear outputs from 100 to 550 kW (130–750 hp). The companies of the second sub-holding specialize in the production of a wide range of road construction machinery (Tverskoy Excavator CJSC, Bryansky Arsenal CJSC, ChSDM CJSC, Exmash JSC, Bryansk Tractor Plant LLC). The Group employs more than 13,000 people and produces more than 10,000 units of equipment and 45,000 motors.
KEY ASSESSMENT FACTORS
The assessment of the operational risk profile stems from the high estimates of the market position and the sub-factor “dependence on subcontracting and components”. The Group is a leader in the moderately concentrated power unit market with a 35% share, and a successful player — along with KAMAZ PJSC — in the highly concentrated four-wheel drive truck market (37%). In addition, UMC is a competitive player in the fragmented market of road construction equipment in several product categories (7% of the market) with leadership in a narrow product segment (motor graders — 55%). The volume of the contract base is about 100% of annual revenue. At the same time, the assessment of the operational risk profile takes into account the low assessment of the sub-factor “characteristics of sales markets” due to the high saturation of the heavy-duty vehicle market in Russia, as well as the high cyclicality of the main industries of consumers of the Group’s products (including road and housing construction, agriculture, and the oil and gas complex). Nevertheless, some segments of this market may show outstripping growth rates. The average assessment of geographical diversification is due to the less than 20% share of export contracts in the revenue structure, while the geography of export supplies is quite extensive. In the coming years, the Company plans to expand its model range and increase the volume of supplies to domestic and foreign markets.
The average level of corporate governance takes into account the strong assessment of the sub-factor “management strategy”. The Group has developed strategies for each business area for a period of five years with annual analysis and adjustment, in accordance with which a long-term investment program, as well as financial and credit strategies, have been approved. The development strategy includes the modernization and expansion of the model range, the implementation of measures to increase the degree of localization, reduce costs and increase production margins, as well as the development of the dealer network and foreign representative offices. The Group applies certain elements of a risk management system (for example, insurance coverage of the maximum range of risks), however, unified documents on risk management have not yet been approved. The risk management methodology is under development and will be implemented after in-depth discussion within the Company. Strategic decisions are made by a board of directors established at UMC level. Structurally, the Group consists of two production divisions. Currently, the structure is being simplified and non-core companies are being liquidated. The senior management of the Company consists of experts with extensive experience in the industry. Financial transparency is average. The company maintains RAS financial statements, and also prepares audited combined financial statements for the two sub-holdings — United Machine Building Group LLC and Machine Building Group LLC — as per IFRS standards on an annual basis. At the same time, there is no practice of public disclosure of operational and financial indicators on a regular basis.
The assessment of the financial risk profile is driven by high profitability and interest coverage, strong liquidity, average estimates of the Group’s size and leverage, and weak cash flow.
The weighted absolute value of operating cash flow (FFO before net interest payments and taxes) for 2018–2023 is more than RUB 5 bln. The FFO margin before interest and taxes was 11.8% in 2020. The Agency expects profitability to stabilize at 10.5% in 2021 and 2022, followed by growth to 12–13% in 2023–2024. The ratio of total debt to operating cash flow (FFO) before net interest payments at the end of 2020 was 3.01x versus 2.88x in 2019. ACRA expects an increase in the Company’s debt burden to 3.18x in 2021 and a subsequent decrease in the value of the indicator to 3.07x in 2022. ACRA expects the Company’s leverage to increase to 3.18 in 2021 and then decline to 3.07x in 2022. The debt portfolio includes ruble obligations in the form of bank loans and borrowings. The repayment schedule is balance and has no peaks in the medium term. The Group is an active participant in the state’s current support measures, which allows it to borrow at preferential rates. The debt servicing indicator (FFO before net interest payments to interest payments) in 2020 was 6.8x compared to 32x in 2019. ACRA expects this indicator to average 5.5x amid growth in FFO before net interest payments.
The strong liquidity assessment is due to the presence of undrawn credit lines from banks, as well as free funds in accounts. At the same time, given the need to finance the investment program, liquidity in the medium and long term will depend on the Company’s ability to attract debt financing.
Free cash flow (FCF), which was negative in 2018 and positive in 2019 and 2020, is a constraining factor in assessing the financial risk profile. The Agency expects the indicator to return to negative values in 2021–2023 due to the growth of capital expenditures. At the same time, ACRA notes that the Company has a certain flexibility in terms of adjusting the investment program depending on the prevailing market conditions.
KEY ASSUMPTIONS
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Average annual growth rate of revenue for 2021–2023 at about 7%;
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Capital expenditures as per the Company’s strategy;
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Maintaining the position of one of the key manufacturers of four-wheel drive trucks and power units;
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No dividend payments.
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:
- Leverage (ratio of total debt to FFO before net interest payments) declining below 2.0x at the same time as positive FCF and an FFO margin before interest and taxes above 15%.
A negative rating action may be prompted by:
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Debt service indicator (ratio of FFO before net interest payments to interest payments) declining below 5.0x;
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Leverage (ratio of total debt to FFO before net interest payments) exceeding 3.5%;
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FFO prior to net interest payments and taxes falling below RUB 5 bln.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): а-.
Support: none.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating of United Machinery Group LLC 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 United Machinery Group LLC to 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 data provided by United Machinery Group LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and United Machinery Group LLC 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 United Machinery Group LLC. No conflicts of interest were discovered in the course of credit rating assignment.
