The credit rating of «SEAP NAMED AFTER SERGO ORDZHONIKIDZE», PJSC (hereinafter, the Company, or the Plant) has been upgraded due to improved liquidity and cash flow metrics on the back of a sustainable growth of FFO before net interest and taxes.
The Company’s credit rating is based on the strong business profile, which takes into account its deep involvement in the state defense order (SDO), medium level of corporate governance, and weak geographic diversification of sales markets. The financial risk profile assessment reflects very high profitability, strong liquidity, medium indicators of leverage, coverage and cash flow, as well as the Company's small size (FFO before net interest and taxes is less than RUB 500 mln).
The Company operates in the field of aviation instrumentation and special armored ground equipment. The Factory is a supplier of avionics for the majority of aircraft models manufactured in the former USSR, the CIS, and the Russian Federation. In order to diversify its business, the Company is implementing projects for the production of critical communication systems and fine chemicals.
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 76% 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 fine chemicals strengthens 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. The Plant is a monopolist in certain areas, and is entering new markets — critical communications and fine chemicals. The Company's products are sold across Russia, and the revenue structure is dominated by the Central, Northwestern and Southern Federal Districts.
The corporate governance assessment is medium. The Company is consistently carrying out its strategy, which involves creating a science-intensive and high-tech instrument-engineering enterprise. The Company’s risk management system is formalized. There are standards in place that regulate the procedure for planning and assessing the effectiveness. The board of directors has an audit committee, an audit commission, and an internal control and internal audit service.
Financial risk profile assessment. In 2022, the Company’s revenue reached RUB 1.8 bln, which is 18.1% higher than in 2021. FFO before net interest and taxes amounted to RUB 479 mln. Given the sustainably positive dynamics of this indicator, the Agency assumes that the weighted FFO before net interest and taxes is likely to exceed RUB 500 mln in the medium term, which may improve the score for the Company's size. The FFO before interest and taxes margin still equaled to 27% in 2022, which exceeded ACRA's expectations.
The total volume of debt obligations decreased in 2022 to RUB 700 mln after a bond issue and certain short-term loans were repaid, which resulted in a decline of the weighted average ratio of total debt to FFO before net interest for 2020–2025 to 2.3x. The interest coverage (the ratio of FFO before net interest to interest) amounted to 3.0x in 2022. ACRA expects this ratio to grow further due to an increase in FFO before net interest. A bond issue dominates the credit portfolio. In the future, the Company may seek to raise long-term preferential funding from state development institutions.
Strong liquidity and medium cash flow. Repayments made by the Company in 2022 improved its leverage and portfolio repayment schedule. As of end-2022, the Company's cash in banks and short-term loans exceeded the volume of loans falling due in 2023. Additional sources of liquidity include positive FFO and undrawn credit lines. Proceeds associated with changes to the working capital contributed materially to the attainment of a positive FCF. The FCF margin is likely to become negative in 2023–2024, given the large-scale capital investments (about RUB 500 mln in 2023 and RUB 300 mln in 2024) and projected dividend payments.
key assumptions
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Implementation of the Company’s revenue and operating cash flow plan for 2023−2025.
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Investment program carried out in accordance with the Company’s business plan.
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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Weighted FFO before net interest and taxes for 2020–2025 exceeding RUB 500 bln;
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The ratio of total debt to FFO before net interest declining below 2.0x;
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The ratio of FFO before net interest to interest exceeding 5.0x.
A negative rating action may be prompted by:
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The FFO before interest and taxes margin weighted for 2020–2025 declining below 15% and the ratio of FFO before net interest to interest declining below 2.5x;
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The ratio of total debt to FFO before net interest exceeding 3.5x coupled with FCF margin falling to negative values.
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 were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided additional services to «SEAP named after Sergo Ordzhonikidze», PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
