The credit rating assigned to PIK Group Public Joint Stock Company (hereinafter, the Company or the Group) is based on the Company’s strong business profile, high business profitability, strong cash flow, high corporate governance quality, low leverage, and very strong liquidity. At the same time, very high industry risk and medium debt service indicators put pressure on the Company’s credit rating.
The Company is the largest residential real estate developer in the Moscow region and the largest player in the Russian construction market. As of September 2017, the total area under construction by the Company was 4.05 million sq. m, and the total area expected to be completed in 2017–2019 amounts to 5.63 million sq. m.
Key rating assessment factors
Industry risk is assessed as very high due to a pronounced cyclical nature of the sector, high amount of overdue payments, and substantial number of companies defaulted in the last five years. The industry the Company belongs to is a very strong factor limiting the credit rating of the Company.
Strong business profile is based on highly diversified project portfolio, sustainable project implementation schedules and conditions, high share of materials / construction operations supplied / performed without subcontractors. The Company’s ability to maintain sales rates is supported by its strong brand and high building standards. The main production capacities are represented by two reinforced concrete factories: PIK-Industry and DSK Grad, with a total annual capacity of 1.05 million sq. m of floor space. The Company plans to expand its manufacturing capacities to increase the share of prefabricated panel construction projects in the portfolio. All prefabricated panel construction operations are performed by the Company itself, without subcontractors. However, for the poured concrete construction operations, the subcontractors are engaged by the Company. At the moment, the poured concrete construction projects account for about 50% of the total construction volumes of the Group.
The Company’s strategy is implemented consistently, deviations are rare. According to ACRA estimates, the Company successfully implements its strategy, and the existing risk management system allows the Company to control key operational risks. Currency risks are virtually absent, as the Company has no earnings or liabilities denominated in any foreign currency. In order to manage risks, the Company maintains a significant amount of free cash on its accounts. The Group’s management structure generally conforms to the best international practices; however, as the main shareholder takes part in the operational management, the key person risk may exist. The Group’s structure is complicated, as each project is managed by a separate legal entity, but this approach is economically justified and typical for the industry. Reports are compiled and published in line with the best world practices. The Group also publishes project appraisal reports; operational reports are published on a quarterly basis.
High profitability is based on the Group’s ability to maintain sustainable sales rates, as well as on relatively low costs and high rates of prefabricated panel construction projects, with the sales prices comparable to that for poured concrete residential buildings of the same class. The Company’s adjusted FFO margin before interest and taxes is expected to be 13% in 2017. ACRA expects a gradual increase in FFO margin up to 16.3% in 2018 and 17.5% in 2019, which is caused by a growing share of completions compared to volume of the projects in the portfolio.
Decreasing leverage, which is planned to be achieved through a gradual debt repayment and an increase of FFO on the back of the growing share of projects on higher stages of development, will lead to the ratio of total debt to FFO before net interest going down from 6.07x in 2017 to 1.61x and 0.67x in 2018 and 2019, respectively. Due to significant amount of free cash accumulated by the Company, the ratio of net debt to FFO before net interest will be 2.65x in 2017, and ACRA expects that the ratio will decrease to 0.12x by 2019. The ratio of FFO before net interest to interest will be 1.3x by the end of 2017, and ACRA expects the ratio to grow up to 3.7x by the end of 2018 and to 7.3x by the end of 2019. At the same time, taking into account interest income from accumulated cash, the ratio of FFO before net interest to net interest will be 3.4x, 6.4x and 12.5x in 2017, 2018 and 2019, respectively.
Strong liquidity is supported primarily by a significant amount of free cash on the Company’s accounts (RUB 31.94 billion as of June 30, 2017). According to ACRA estimates, the weighted current liquidity ratio was 3.9x as of September 01, 2017. For the purposes of forecast liquidity calculations, payments under a non-deliverable financial instrument concluded with VTB Bank were also included in the FCF estimations.
Strong cash flow assessment stems largely from the expected decline in the Company’s leverage. The Group's FCF margin was very high in the past (ranging from 12.2% to 32.9% in 2014–2016), which was largely due to the leverage decrease strategy and the associated lack of dividend payments. The Company intends to continue to reduce the leverage (which has grown significantly due to the acquisition of Morton Group), but, at the same time, the Company adopted a new dividend policy, according to which dividend payments shall be at least 30% of the operating cash flow. According to ACRA estimates, the FCF margin will range from 5.5% to 8.7% in 2017–2019. In its FCF calculations, ACRA took into account the costs under non-deliverable financial instrument, which was concluded with VTB simultaneously with the sale of the Company’s share repurchased earlier under an offer.
Key assumptions
- The Company to maintain the planned construction and sales rates;
- ACRA took into account only projects under construction and projects expected to be completed in accordance with the financial plan of the Company;
- Residential housing prices in the primary market of Moscow region to remain unchanged in 2017–2019;
- Cost of construction work and materials to overrun residential housing prices; salaries to grow on par with the inflation rate.
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:
- FFO before net interest to interest going up above 8х amid total debt to FFO before net interest going down below 1х;
A negative rating action may be prompted by:
- FFO before net interest to interest going down to 2,5х in 2018–2019;
- Total debt to FFO before net interest going up above 2х in 2018–2019;
- Residential housing prices in the primary market of Moscow region going down by more than 10% by 2019 amid unchanged costs of construction work and material;
- A significant worsening of access to external sources of liquidity;
- Regulatory changes able to affect the Company.
Rating components
Standalone creditworthiness assessment (SCA): bbb+.
Adjustments: 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 and is 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.
Disclosure of deviations from the approved methodologies: ‘leverage’ factor was assessed not in line with the assessment range specified in the methodology.
A credit rating has been assigned to PIK Group Public Joint Stock Company for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (September 26, 2017).
The assigned credit rating is based on the data provided by PIK Group Public Joint Stock Company, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and PIK Group Public Joint Stock Company participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by PIK Group Public Joint Stock Company in its financial statements have been discovered.
ACRA provided no additional services to PIK Group Public Joint Stock Company. No conflicts of interest were discovered in the course of credit rating assignment.
