The credit rating assigned to JSC Avangard-Agro (hereinafter — Avangard-Agro or the Company) stems from its adequate business profile, very high profitability, strong cash flow, medium debt load and high coverage of interest payments. On the other hand, the rating is affected by the Company’s medium size, limited ability to influence product prices, concentration of shareholder risks on the sole beneficial owner, and high share of short-term debt causing liquidity risks.
Avangard-Agro is an agro holding focusing on cereals and technical crops in the northern and central areas of the Central Black Earth region of Russia. The ultimate beneficiary of the Company is K. Minovalov. The 2016 earnings of Avangard-Agro are RUB 18 billion and the net profit is RUB 4.7 billion.
Key rating assessment factors
Limited ability to influence product prices increases the volatility of cash flows. The Company focuses on exchange-traded products in a fragmented and high-competitive segment. According to the 2016 data, the gross volume of Company’s crops (for main crop plants) was about 1% of the total Russian volume. Such market positon diminished the Company’s ability to influence the prices and obtain better conditions from purchasers and suppliers. However, these weaknesses are compensated in part by: (1) a large land bank owned by the Company, which amounted to 390,000 hectares (8th place among the 50 largest agricultural holdings in Russia) at end-2016; (2) a significant share in the domestic market in terms of brewing barley (about 27% in 2016); (3) crop yields exceeding the national average yields for major crops.
Medium assessment of the Company's business profile is supported by a substantial product diversification. As of 2016, the share of the largest product (malt) in the revenues was as low as about 30%, which reduces the dependence on the demand for certain crops. The business profile assessment is also underpinned by a moderate share of export sales in the Company’s revenues (about 30% in 2016), which reduces the dependence on prices and demand in the domestic market. However, the assessment is constrained by a low degree of vertical integration of the Company and a small share of products with high added value (malt) in the structure of its revenues.
Sole ownership and high proportion of related party transactions. Concentration of shareholding risks on the sole beneficial owner who takes an active part in the strategic and operational management of the Company causes a limiting effect on the rating. ACRA notes the lack of formalization of dividend policy and regulation of risk and capital management functions at Avangard-Agro. The rating also reflects a high proportion of funds borrowed from affiliates, primarily “AVANGARD” Joint Stock Bank (hereinafter referred to as AVANGARD Bank or the Bank), in the Company's debt portfolio. At the end of 2016, funds borrowed from related parties amounted to 80% of the Company’s debt. This fact, coupled with a high proportion of the Company’s short-term debt, puts the Company’s creditworthiness in direct dependence on the Bank’s creditworthiness. Risks of related party funding are partly offset by the fact that: (1) the terms of lending provided to the Company by AVANGARD Bank do not differ materially from the terms applied to other counterparties, (2) the Company plans to gradually reduce the share of related-party funding starting from 2017.
Medium size of business. In 2016, the Company’s FFO before mandatory payments and taxes was about RUB 8 billion, which is lower than that showed by such industry leaders as Cherkizovo Group PJSC, Agroholding Miratorg JSC and Rusagro Group JSC.
Very high profitability. The average profitability calculated as the ratio of FFO before interest and taxes to revenue was about 40% in 2014-2016. Such high profitability stems from (1) high yields in main crops, and (2) high profitability of key products (malt and high-quality wheat). ACRA expects that Avangard-Agro will be able to maintain high profitability within the next 12-18 months.
Average level of debt burden and high degree of interest coverage. At the end of 2016, the debt burden of Avangard-Agro (expressed as the ratio of total debt to FFO before net interest) was at an average level of about 2.1x. ACRA notes a significant reduction in the Company’s debt burden compared to that in 2014 (at 4.7x). The Agency also notes a high degree of coverage of interest payments (FFO before net interest to total interest) — the ratio was 7.7x in 2016.
Strong cash flow. The FCF of Avangard-Agro was 16% and 17% in 2016 and 2015, respectively. This is explained by the high profitability, profit tax benefits and moderate capital investments. ACRA expects that the Company will maintain such FCF in the next 12-18 months.
Very high share of short-term debt causes liquidity risks. In the next 18 months, starting July 1, 2017, the repayments will be about 65% of the total debt or about RUB 14 billion. This amount is not covered by cash balances as of June 30, 2017 and undrawn credit facilities (about RUB 2 billion), most of which expire before the end of 2017. According to ACRA estimations, in this period the short-term liquidity ratio will be in the range of 0.7-0.9. The above risks are partly compensated in part by (1) the fact that 75% of total repayments is due to a related party (AVANGARD Bank), which increases the likelihood that this part of the debt will be refinanced, (2) a stable nature of relationships with Sberbank (AAA(RU) assigned by ACRA).
Key assumptions
- Stable stock of farmland of 390 thousand hectares; no purchases of land in the next three years;
- Annual capital investments at a supportive level of RUB 300–500 billion;
- Sustainable FFO before interest and tax at about 40%;
- Sustainable dividend payments (in the form of share repurchase) at the 2016 level of about RUB 3 billion.
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:
- a significant extension of the scope of operations on the backdrop of strong financial performance and better liquidity position;
- a better corporate management and a significantly lower share of funding from related parties.
A negative rating action may be prompted by:
- debt burden above 4х or net interest payments coverage below 5х for a long time;
- FFO before loan interest and tax below 30% for a long time;
- a significant limitation of access to external sources of liquidity;
- a lower creditworthiness of AVANGARD Bank.
Rating components
Standalone creditworthiness assessment (SCA): bbb.
Adjustments: Group influence, 1 notch down from SCA.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, the Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used By The Analytical Credit Rating Agency Within The Scope Of Its Rating Activities.
The credit rating has been assigned to JSC Avangard-Agro for the first time. The credit rating and outlook are expected to be revised within one year following the rating action (July 27, 2017).
The credit rating is based on the data provided by JSC Avangard-Agro, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and JSC Avangard-Agro participated in its assignment.
No material discrepancies between the data provided and the data officially disclosed by JSC Avangard-Agro in its financial statements have been discovered.
ACRA provided no additional services to JSC Avangard-Agro. No conflicts of interest were discovered in the course of credit rating assignment.
