The credit rating of AGROECO Group LLC (hereinafter, AGROECO Group, or the Company) is based on the medium assessment of the business profile, which in turn reflects, on the one hand, considerable vertical integration, and on the other hand, moderate product diversification and a significant share of products with high added value. The rating is supported by high assessments of market position. Corporate governance and geographic diversification are assessed as medium.
Very high profitability has a positive impact on the block of financial factors. The Company is distinguished by high debt service and strong liquidity associated with the presence of significant free credit limits in banks and cash reserves in AGROECO Group’s accounts and deposits. The Company’s business size is assessed as medium. The credit rating is negatively affected by the high leverage and negative free cash flow (FCF), which are explained by investments in investment projects for the further development of the Company’s production capacities.
AGROECO Group is one of the largest vertically integrated pork production holdings in Russia. AGROECO Group includes production capacities, a meat processing plant, feed mills, breeding and genetic centers, and crop fields for growing grain.
KEY ASSESSMENT FACTORS
Strong market position assessment. According to the National Union of Pig Breeders, the Company ranks fourth in Russia for pork production and only considerably lags behind the market leader — Miratorg AIH. The Company can annually produce around 335,000 tons of products in live weight, which corresponds to 6% of total pork production in Russia. The volume of pork produced by the Company has grown by four times since 2019.
Strong business profile assessment. The degree of vertical integration of AGROECO Group is assessed by the Agency as high. The Company is a full-cycle agro-industrial holding. The pig population is raised at its own 37 production sites. In addition, the Company has a modern meat processing plant with a processing capacity of 3.8 mln heads per year, three feed mills that 100% cover the Company’s needs for processing and feed supply, as well as its own cultivated area of 100,000 hectares, covering the needs for grain crops by 30%. The Company’s structure also includes two breeding and genetic centers.
The production of products with high added value is assessed by the Agency as high. AGROECO Group’s revenues of are generated through the sale of pork in live weight and half carcasses. The share of production of products with high added value in the form of half carcasses and products in industrial packaging is growing annually as the Company’s own meat processing plant is put into operation. By the end of 2024, according to the Company’s forecasts, income from processing will reach 92% of revenues, thanks to which the Company will become one of the five largest players in the packaged pork market in Russia. Considering the difference in average prices for live pork and ham in 2023 at 124%, revenue growth could reach 31% in the next two to three years.
The Company is characterized by moderate product diversification. 21% of revenues come from the production and sale of live pigs, and 78% is from processed products (35% from half carcasses and 43% from industrial packaging).
The medium assessment of geographic diversification is based, on the one hand, on the low volume of exports and the limitation of the national sales market to the regions where the Company operates, and on the other hand, on the proximity of production sites to the Company’s meat processing plant and main sales markets. This is a competitive advantage of AGROECO Group over other players that are represented in the Central Federal District, but produce products in other federal districts. The Company has minimized heightened biological risks through strict disinfection measures and separation of logistics flows between different sites.
Medium assessment of corporate governance. Regulation of corporate procedures and policies in the field of risk management is in the process of formation. The Company acquires insurance for agricultural and property risks from reliable insurance companies. AGROECO Group has long-term strategic guidelines with a phased plan for the implementation of investment projects for the development of dairy farming and changing the share of deep processing of products, which may lead to an increase in the Company’s revenues and strengthening of its market positions.
The Company has a board of directors, although ACRA notes that beneficiaries are engaged in operational management. AGROECO Group’s financial transparency, according of the Agency’s assessments, is medium — the Company prepares IFRS reporting, but does not publish it.
Medium size of the Company and very high profitability. AGROECO Group’s revenues amounted to RUB 37 bln in 2022. Taking into account the production plan and transition to issuing products with higher added value, the Company’s revenues may reach RUB 48 bln from 2023 to 2024, according to the Agency’s estimates. According to ACRA’s calculations, in 2023 FFO before net interest payments and taxes may reach RUB 12 bln, while the weighted average value of this indicator may reach RUB 16 bln for 2024–2026, which corresponds to a medium assessment of business size as per ACRA’s methodology.
AGROECO Group has very high profitability. The FFO margin before net interest payments and taxes was 28% in 2022, and, according to ACRA’s estimates, will remain at this level in 2023–2026 and corresponds to a very high assessment.
Increased leverage and high interest payment coverage. In 2023, the ratio of total debt to FFO before net interest payments may decrease to 3.8x from 4.3x in 2022. ACRA expects AGROECO Group’s leverage to decrease to 2.6x by 2026 against the backdrop of a reduction in borrowing to finance capital expenditures. At the same time, it is worth noting the high level of qualitative assessment of leverage, taking into account the balanced structure of the debt portfolio in terms of both terms and repayment schedule, as well as rates (with relative dependence on the largest creditor).
The Agency notes the high coverage of interest payments — the weighted average ratio of FFO before net interest payments to interest payments for 2021–2026 is estimated at 5.5x. The indicator is significantly influenced by the Company’s access to preferential investment and working loans at subsidized rates.
High liquidity and very weak cash flow. The Company maintains high liquidity due to significant cash balances in accounts and deposits, which it considers to be reserves for unforeseen expenses, as well as due to significant free limits in banks, exceeding short-term obligations and planned medium-term capital expenditures. The qualitative assessment of the Company’s liquidity is medium due to limited access to external sources of liquidity.
The main pressure on the FCF margin will come from planned capital investments. The volume of capital expenditures to revenues exceeds 20%, which is estimated as the minimum indicator according to ACRA’s methodology. AGROECO Group’s dividend policy is not formalized, but the Company has plans for annual dividend payments in 2024–2026 in the amount of up to 13% of net profit. Taking into account these factors, the Company’s FCF is estimated at a very low level.
KEY ASSUMPTIONS
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Pork prices being maintained at the 2023 level in 2024–2026;
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Annual dividend payments in 2024–2026 not exceeding 13% of net profits;
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Carrying out the investment program as per the announced parameters;
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Access to external liquidity sources.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the credit rating will highly likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average ratio of total debt to FFO before net interest payments falling below 2.0x coupled with significantly improving the structure of the debt portfolio from the point of view of terms and repayment schedule, as well as reducing dependence on the largest creditor;
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Weighted average ratio of FFO before net interest payments to interest payments exceeding 8.0x while simultaneously increasing financial transparency and improving corporate governance practices;
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Stable transition of the FCF margin to positive values.
A negative rating action may be prompted by:
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Ratio of total debt to FFO before net interest payments exceeding 5.0x;
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FFO ratio before net interest payments to interest payments falling below 5.0x;
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Materialization of biological or climatic risks that could worsen the Company’s financial risk profile;
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FFO margin before net interest payments and taxes falling below 15%;
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Deterioration of access to external liquidity sources.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): а-.
Support: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to AGROECO Group 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.
A credit rating has been assigned to AGROECO Group LLC for the first time. 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 AGROECO Group LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and AGROECO Group 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 AGROECO Group LLC. No conflicts of interest were discovered in the course of credit rating assignment.
