The credit rating of «SEAP NAMED AFTER SERGO ORDZHONIKIDZE», PJSC (hereinafter, the Company, or the Plant) has been affirmed due to the Company maintaining credit metrics in the range established for this rating level. The credit rating outlook has been changed fr om Stable to Positive to reflect the Agency’s expectations of improved cash flow and liquidity due to further growth of FFO before net interest payments and taxes.
The Company’s credit rating is based on its small size (FFO before net interest payments and taxes is less than RUB 500 mln), weak geographical diversification of sales markets, and medium corporate governance, as well as a low assessment of financial transparency. However, the Company has a strong business profile, which takes into account its deep involvement in the state defense order (SDO).
The financial risk profile assessment is based on very high profitability and medium leverage and coverage. However, low cash flow and liquidity assessments due to increased capital expenditures and bond redemption this year lim it the rating.
The Company operates in the field of aviation instrumentation and special armored ground equipment. The Factory is a supplier of on-board radio-electronic equipment for the majority of aircraft models produced in the former USSR, the CIS, and the Russian Federation. Projects are being implemented for the production of critical communication systems and low-tonnage chemistry products as additional segments aimed at diversifying the activities of the Company. The Company is owned by a group of private shareholders.
key assessment factors
Strong business profile assessment. The Company’s stable financial indicators stem from a substantial contract base formed as part of the Plant’s participation in the implementation of the SDO (around 75% of revenues), as well as a wide technological base and low dependence on subcontracting. The Company largely controls the entire production chain, which leads to high business profitability. The production cycle includes development (including research and design), production, and warranty and post-warranty service. The Company’s sales markets have moderate cyclicality and saturation. The current conditions of geopolitical uncertainty and the need to form a domestic civil aviation fleet create increased demand for the Plant’s products, while the launch of production of critical communication systems and low-tonnage chemical products increases the Company’s role in the implementation of priority national import substitution programs.
Medium assessment of market position and low sales market diversification assessment. The Company is a competitive player in the aviation instrumentation market and the special armored ground equipment market. At the same time, the Plant is a monopolist in certain product areas, and is entering new markets — critical communications and low-tonnage chemicals. Products are sold in Russia, and the revenue structure is dominated by the Central, Northwestern and Southern Federal Districts. Exports account for an insignificant share of revenues.
The medium corporate governance assessment reflects the medium assessments (in the context of the Russian corporate segment) of sub-factors such as management strategy, risk management, and management structure.
The Company is consistently carrying out its development strategy, which involves creating a science-intensive and high-tech instrument-making enterprise that produces devices and automatic control systems for not only aviation, but also general industrial use. The Company’s risk management system is formalized and governed by a key document — the Internal Control and Risk Management Policy. There are permanent standards in place that regulate the procedure for planning and assessing the effectiveness of actions with regard to risks related to the Company’s core operations, as well as those that impact the fulfilment of contractual obligations. The board of directors has an audit committee, and an audit commission and an internal control and internal audit service have been formed for carrying out monitoring of financial and business activity. Shareholder capital is concentrated in the hands of a group of private shareholders. ACRA assesses the group structure sub-factor as high based on its simplicity and lack of major transactions with related parties. The Company reports under RAS, however, work is underway to introduce IFRS reporting, which in the future will have a positive impact on the financial transparency assessment.
Financial risk profile assessment. The Company’s revenues continued to grow steadily in 2021 and amounted to RUB 1.5 bln. At the same time, FFO before net interest payments and taxes is less than RUB 500 mln, which is a constraining factor. The Company retains very high FFO profitability before interest and taxes, which in 2021 amounted to 27%. Taking into account current structural changes in the economy and the creation of new logistics chains, ACRA expects FFO profitability before interest and taxes to decline to 20–21% in 2022. Leverage is medium. The ratio of total debt to FFO before net interest payments was 3.6x in 2021. Taking into account planned repayments for the bond issue and credit lines, ACRA expects this indicator to gradually decline. The Company’s debt portfolio is solely made up of ruble-denominated liabilities — revolving and non-revolving credit lines, as well as bonds. Interest payment coverage (the ratio of FFO before net interest payments to interest payments) was 2.8x in 2021. ACRA expects the size of interest payments to grow in 2022 and then decline due to the sharp change in the Bank of Russia’s key rate. However, in 2023 the Agency expects FFO before net interest payments to interest payments to grow to 3.8–4.0x due to the overall decline in leverage. The Company’s liquidity assessment is influenced by the upcoming repayment of the bond and loans that were attracted to carry out contracts, as well as the limited volume of undrawn credit lines. At the same time, the Company possesses internal funds that have been placed in deposits, as well as money that has been loaned and is expected to be returned in 2022–2023.
Low cash flow. In 2021, free cash flow (FCF) returned to positive territory due to a fall in the volume of capital expenditures. ACRA expects FCF to be just above zero in 2022–2023, and then grow in 2024.
key assumptions
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Implementation of the Company’s revenue and operating cash flow plan for 2022−2024;
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Investment program carried out in accordance with the Company’s business plan.
potential outlook or rating change factors
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Ratio of FFO before net interest payments to interest payments exceeding 5.0x;
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FCF profitability exceeding 2%.
A negative rating action may be prompted by:
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Ratio of total debt to FFO before net interest payments exceeding 3.5x coupled with FCF profitability falling to negative values and deterioration of access to liquidity sources;
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Ratio of FFO before net interest payments to interest payments falling below 2.5x.
rating components
Standalone creditworthiness assessment (SCA): bbb-.
Support: 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.
The credit rating of «SEAP named after Sergo Ordzhonikidze», PJSC was published by ACRA for the first time on August 20, 2020. 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 «SEAP named after Sergo Ordzhonikidze», PJSC, information from publicly available sources, and 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.
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 «SEAP named after Sergo Ordzhonikidze», PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
