The credit rating of “Sibenergomash — BKZ” LLC (hereinafter, Sibenergomash, the Factory, or the Company) has been affirmed due to the Company maintaining its credit metrics within the range established for the rating. At the same time, ACRA notes positive changes in the growth of the Company’s contract portfolio and an increase in the volume of produced products. However, the decrease in profitability in the first quarter of this year may have a constraining effect on the growth of indicators by the end of 2022.
The credit rating is based on average assessments of the Company’s market position, business profile, geographic diversification, and corporate governance. The financial risk profile assessment takes into account the medium leverage and coverage, as well as the low cash flow and small size of the Company.
Sibenergomash specializes in the production of high capacity power boilers, industrial fans and smoke extractor fans, vessels and heat exchange equipment, and press forging products. The Factory supplies equipment to large thermal power plants, and the facilities of metallurgy, petrochemistry and other industries. Besides designing and manufacturing new equipment, the Factory produces components for the reconstruction of existing boilers. The Company’s annual production (technological potential) amounts to 22,000 tons of products. The Company employs 836 people.
key assessment factors
Medium business profile assessment. The Factory continues to increase the volumes of production of power equipment, developing business relations with the largest mining and manufacturing companies. The portfolio of orders in production is steadily growing and currently amounts to around RUB 7 bln. Most revenues come from boiler equipment (around 75%). Sibenergomash continues to develop its own technological base and the production of new products. In particular, contracts have been signed on the supply of frames for turbo generators used in shipbuilding. Steady demand for equipment for the thermal energy sector is determined by the Capacity Supply Agreement 2 program. As a positive factor, we can note an increase in advance payments as part of contract execution (up to 50%), which has a favorable effect on reducing the need to borrow funds and the cost of financial resources. The Company is a significant player in the Russian power equipment market, and also exports products. The share of export revenues in 2021 was around 12%. This share is not expected to grow this year, and as a result the assessment of geographic diversification is still medium.
Corporate governance and a possible change of owner. An important event for the further development of the Factory is the start of the procedure to find a new owner. Sibenergomash, which is owned by the VEB.RF group, has been put on sale. A 100% share in the Factory’s charter capital is for sale, as well as property (moveable and immovable), which is currently used by the Company under lease contracts. ACRA positively assesses the potential entry of a dedicated investor, while the sale of this single lot will simplify the Company’s structure and positively impact its rating.
Small size of the Company and medium profitability. In 2021, revenues grew by 25.8%, while weighted (for 2019 to 2024) FFO before net interest payments and taxes is expected at RUB 169 mln, which largely due to both an increase in production volumes and higher prices for the Factory’s products. The FFO margin before net interest payments and taxes was 9.2% in 2021. According to reporting for H1 2022, the Company recorded a decrease in profitability against the backdrop of revenue growth. As a result of the increase in prices for metals (the main raw materials), as well as an increase in wages for the Factor’s employees, the gross profit margin, which amounted to 22.8% by the end of 2021, decreased to 9.7% in the first quarter of this year, followed by an increase to 13.3% in the second quarter. ACRA expects an improvement in profitability indicators in H2 2022, and the weighted value of the FFO margin before net interest payments and taxes (for 2019 to 2024) at 6.9%.
Medium leverage. Total debt to FFO before net interest payments was 1.4x in 2021, which was driven by the postponement of a bond placement until 2022. This year, the Company will complete the placement of three-year bonds, and has credit lines from two commercial banks. The Agency notes an improvement in the structure of the loan portfolio with regard to diversification of sources, as well as longer maturity of obligations. Loans are raised to finance production under signed contracts. Interest coverage is also medium — the weighted (for 2019 to 2024) assessment of FFO before net interest payments to interest payments will amount to 4.7x.
The cash flow has declined is due to a decrease in the FCF margin in 2021 (to -11%) as a result of an increase in the Company’s working capital (inventories and accounts receivable). The Company has a fairly balanced repayment schedule without peak values in the medium term.
key assumptions
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Average annual growth of revenue at no less than 10% in 2022–2024;
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Capital expenditures in line with the Company’s plans in 2022–2024;
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No 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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FFO before net interest payments to interest payments growing above 5.0x;
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FFO margin before interest and taxes growing above 10% and FCF margin turning positive.
A negative rating action may be prompted by:
- Total debt to FFO before net interest payments exceeding 3.5x and FFO before net interest payments to interest payments falling below 2.5x.
rating components
Standalone creditworthiness assessment (SCA): bb.
Support: none.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating has been assigned to “Sibenergomash — BKZ” LLC 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 “Sibenergomash — BKZ” LLC was published by ACRA for the first time on September 14, 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 “Sibenergomash — BKZ” LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and “Sibenergomash — BKZ” LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to “Sibenergomash — BKZ” LLC. No conflicts of interest were discovered in the course of credit rating assignment.
