The credit rating of Kingisepp Machine Building Plant Limited Liability Company (hereinafter, KMZ, the Company, or the Group) is based on the strong business profile, as well as medium assessments of market position, geographic diversification of sales markets, and corporate governance. The financial risk profile assessment reflects the medium profitability, medium assessments of leverage and liquidity, low interest payment coverage, weak cash flow, as well as the below medium size of the Company.
KMZ is a machine building enterprise of Russia’s defense industry, which specializes in the production, repair and delivery of diesel, gas turbine, and deck equipment. Over a short period of time, KMZ has become a production holding that brings together seven companies with production facilities in Saint Petersburg and the Leningrad Region.
KEY ASSESSMENT FACTORS
Medium operational risk profile. The Company is a competitive player in a moderately concentrated market and supplies diesel, gas turbine, and deck equipment. At the same time, in individual areas (segments) it acts as the sole supplier. These segments include the supply of a certain range of spare parts for marine engines and the production of special-purpose boats.
The strong business profile assessment stems from the fact that the Company has a wide contract base that consists of different government agencies and organizations (the portfolio size exceeds two annual revenues) and a broad technological base. In-house production includes a machining shop with an extensive range of machines, welding and casting sections, and production of rubber products. In addition, the Group has its own design office. Sales markets have low cyclicality and saturation, which forms stable demand for KMZ’s products. National sales markets are diversified since the Company’s customers are located across the entire territory of Russia. The share of export sales is less than 20% of revenue.
The Company is consistently carrying out an active growth strategy that involves development of its own competencies and technological capabilities, entering new market segments, and producing new types of products as part of the import substitution policy of the Russian shipbuilding industry. The Group has not yet formalized a long-term development strategy and investments are carried out in order to fulfil the long-term order portfolio.
The Company has individual elements of a risk management system (including an approved internal policy for controlling the production process and preventing violations of contract terms). KMZ does not have a board of directors; it is managed by a sole executive body. In addition, there is a collegial body — the board of executives, which includes the sole executive bodies of the Group’s companies. The structure of KMZ is somewhat complicated (it includes production facilities and asset managers), some of the transactions are carried out with related parties.
Below medium size of business. The Company’s revenues amounted to RUB 6.8 bln in 2023, and may grow to RUB 7.7 bln in 2024. Weighted average FFO before net interest payments and taxes was RUB 1.2 bln in 2022–2027, which corresponds to a below medium size of business (as per ACRA’s methodology). The weighted average FFO margin before net interest payments and taxes for the same period was 12.2%.
Medium leverage and low debt servicing. The weighted average ratio of total debt to FFO before net interest payments was 2.7x for 2022–2027. The Company’s debt obligations for 2024–2025 are expected to be RUB 3 bln. The loan portfolio includes ruble-denominated loans and other borrowings with a comfortable repayment schedule. The interest payment indicator (ratio of FFO before net interest payments to interest payments) was 5.0x in 2023. The Agency expects the cost of debt servicing to increase over the forecast horizon of 2024 to 2027, which will lead to this indicator falling (its average weighted value for 2022–2027 is expected to be 1.9x).
Medium liquidity and weak cash flow. The assessment of the Company’s liquidity takes into account significant cash balances in accounts, as well as comfortable conditions for performing settlements with clients (high share of advance payments). At the same time, the need to finance growth of working capital as part of the Group’s production cycle may result in the need to borrow funds. Currently the Company does not have available limits under credit lines but considers the bank’s proposal to open additional limits. Moreover, the Company is expected to issue bonds in 2024. The weighted average free cash flow (FCF) margin is -2.9% for 2022–2027. The negative value of this indicator is the result of investment expenditures of around RUB 200 mln annually and financing the growth of working capital.
KEY ASSUMPTIONS
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Average annual growth of revenues at no less than 20% from 2024 to 2027;
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Total size of the investment program at no more than RUB 1,200 mln over 2024–2027;
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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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Weighted average FFO margin before net interest payments and taxes exceeding 15% coupled with the weighted average FCF margin exceeding 2%;
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Weighted average ratio of total debt to FFO before net interest payments falling below 2.0x coupled with the ratio of FFO before net interest payments to interest payments exceeding 2.5x.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest payments to interest payments falling below 1.0x;
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Weighted average ratio of total debt to FFO before net interest payments exceeding 3.5x;
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Deterioration of liquidity;
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Weighted average FFO margin before net interest payments and taxes falling below 10%.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb-.
Support: none.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings 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 Kingisepp Machine Building Plant Limited Liability Company 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 Kingisepp Machine Building Plant Limited Liability Company, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Kingisepp Machine Building Plant Limited Liability Company 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.
The decision to assign a BBB-(RU) credit rating, outlook Stable, to Kingisepp Machine Building Plant Limited Liability Company was made at a repeat meeting of the rating committee, taking into account ACRA’s review of an appeal against the rating committee’s decision to assign a BBB-(RU) credit rating, outlook Stable, to Kingisepp Machine Building Plant Limited Liability Company. The level of the credit rating and the credit rating outlook were not changed following the review of the appeal.
ACRA provided no additional services to Kingisepp Machine Building Plant Limited Liability Company. No conflicts of interest were discovered in the course of credit rating assignment.
