The credit rating of United Machinery Group LLC (hereinafter, the Group, the Company, or UMG) has been affirmed to reflect the Company's credit metrics remaining within the ranges established for this credit rating level. In 2021, the FFO before interest and taxes margin decreased slightly, while the leverage increased, but this did not have a negative impact on the weighted values of the rating model indicators.
The Group's credit rating is based on the strong market position, and the medium 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 medium leverage and the weak free cash flow (FCF).
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 engines.
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 medium 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 medium level of corporate governance takes into account the strong assessment of the sub-factor “management strategy”. 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 medium. 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 determined by the medium score for business size (the absolute value of FFO before net interest and taxes is less than RUB 30 bln), high score for profitability (the ratio of FFO before interest and taxes to is about 10%), and medium assessment of leverage and high assessments of coverage and liquidity. The rating-constraining factor is a low FCF assessment.
In 2021, due to the outpacing growth in costs, the profitability ratio decreased to 8.4% against 11.8% in 2020. ACRA expects that as the model range expands and the own manufacture of axles is launched, profitability will increase. The leverage ratio stood at 3.9x against 3.0x in 2020 amid an increase in the absolute debt and a decrease in the operating flow. ACRA expects the leverage to be within 3.0x in 2022. The debt service ratio (the ratio of FFO before net interest to interest) was 5.1x in 2021 against 6.8x in 2020. ACRA expects that this ratio may drop below 5.0x due to the growth of interest rates in 2022, however, in 2023 and 2024, in ACRA's opinion, the ratio will steadily exceed 5.0x.
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.
FCF, which was negative in 2021 due to increased investments in both fixed and working capital, is a constraining factor for the financial risk profile assessment. The Agency expects in the forecast period, FCF will be volatile, so that the cash flow sub-factor score remains low due to the growing investment program. 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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Manufacture growth rates in line with the Company's business plan.
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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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Balanced dividend payments.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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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%.
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.
The credit rating assigned to United Machinery Group LLC was published by ACRA for the first time on August 18, 2021. 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.
