ACRA upgrades PJSC Kirovsky Zavod to BBB-(RU), outlook Stable

The credit rating of PJSC Kirovsky Zavod (hereinafter, the Company) has been upgraded based on an improved assessment of the management structure sub-factor (increased from very low to low) due to a number of positive changes. These changes mainly relate to greater certainty with regard to the Company maintaining the 51% stake in JSC Peterburgsky Tractorny Zavod (hereinafter, PTZ) which was offered as part of an option signed with QUESTRA SOLUTIONS LTD, positive outcomes on lawsuits filed against the Company by a group of minority shareholders, and an updated board of directors. The key factors that determine the rating continue to be the size of the Company’s business, which is below average for the corporate sector, low free cash flow (FCF) assessment, and a consistently low corporate governance assessment.

The Company is a conglomerate of machinery production enterprises located in St. Petersburg. The Company’s main activity is the production of agricultural machinery under the brand “Kirovets”. The Company is one of Russia’s leading players in this segment. In addition, the Company includes metallurgical production and as well as enterprises producing energy and industrial machinery. ACRA has no information on whether the Company has a controlling ultimate beneficiary.

Key rating assessment factors

ACRA maintains its low assessment of the Company’s corporate governance. This is due to the absence of documented and approved corporate procedures for financial and dividend policy and management of conflicts of interest, as well as an underdeveloped technological risk management system that resulted in a fire at PTZ. In addition, the board of directors does not include key committees, which are required to professionally resolve issues related to strategy, auditing (internal and external) and personnel motivation. Besides this, the ownership structure is not entirely transparent, which means it is not possible to establish the ultimate beneficiary of the Company. At the same time, ACRA notes that the long-term conflict between the Company’s management and a group of minority shareholders, which resulted in the latter filing a number of corporate lawsuits, has been resolved from a legal point of view, with a court ruling in favor of the Company. Positive changes have also happened in the board of directors, which now includes five independent members. The new board of directors is currently working on forming the main committees and development corporate governance policies.

The Company’s average business profile is characterized in particular by the low long-term contract base as well as the increased volatility of sales in the Company’s enterprises. Agricultural equipment and rolled steel are sold mainly under short-term contracts. Only 20% of the Company’s revenue comes from long-term contracts (1–2 years) for government orders in the energy and industrial engineering segment.

The Company is well diversified in terms of markets. Agricultural machinery is purchased as part of the investment activities of agricultural holdings and farms, while steel products are purchased by automakers to cover current needs. Energy and industrial engineering enterprises operate in the business-to-government (B2G) segment.

The Company’s low dependence on subcontractors and suppliers of spare parts is thanks to the high share of its proprietary production. For example, PTZ produces around 35–40% of the spare parts on its own. The share of imported components does not exceed 25% of production costs.

Small size of business and high profitability. The weighted FFO before net interest payments and taxes for 2017–2022 was RUB 4.6 bln, which, according to ACRA’s methodology, corresponds to a below-average business size. Within the forecast period, growth in the size of the Company’s business is possible through sales in the engineering segment as well as through the launch of a new project in 2020 — LLC “NPO Laboratory of Special Steels and Alloys” (hereinafter, LSSA), which is part of the Company’s metallurgical segment. Average FFO profitability before interest and taxes for 2017–2019 was 15%, which is a high indicator for a company in the machinery segment. ACRA believes that the average profitability will remain at 15% for 2020–2022.

Average leverage and liquidity indicators. At the end of 2019, the ratio of total debt to FFO before net interest payments was 2.5x. ACRA expects leverage to increase to 4.3x in 2020 due to increased borrowings, which are necessary to finance the growing investment program. Almost all of the Company’s debt is denominated in rubles (98%). In 2020, public debt in the form of a RUB 1 bln bond (5% of the debt portfolio) was added to the debt portfolio. 11% of the portfolio consists of targeted loans provided by the Industry Development Fund. ACRA notes the Company’s moderate liquidity and the generally balanced structure of its debt portfolio, but there are some minor imbalances in terms of the repayment schedule, which peaks in 2022. In ACRA’s opinion, refinancing risk is acceptable given the Company’s long experience of cooperation with its two main creditor banks (BANK "ROSSIYA" (A+(RU), outlook Stable) and Bank «Saint-Petersburg» PJSC (A(RU), outlook Stable)) and the significant amount of credit lines available in these banks.

Key assumptions

  • Maintaining whole ownership of PTZ (without exercising the 51% stake option);
  • Moderate growth in demand in the Russian tractor market due to the significant wear of agricultural machinery, as well as the absence of crises in this market;
  • Launch of the new LSSA project in 2020 and reaching full capacity by 2021;
  • Executing planned contracts in the energy and industrial engineering segment.

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:

  • Further measures to improve the quality of corporate governance;
  • Leverage (ratio of total debt to FFO before net interest payments) falling below 2.0x;
  • Maintaining positive FCF;
  • Increased market share in the tractor segment, successful launch of the LSSA project resulting in strengthened market positions, and an increase in FFO before interest and taxes higher than RUB 5 bln over two years.

A negative rating action may be prompted by:

  • Decreased sales in agricultural machinery;
  • Escalation in the conflict with shareholders;
  • Fewer state contracts in the energy and industrial engineering segment than originally planned;
  • Significant deterioration of access to external sources of liquidity;
  • Implementation of the option to sell the 51% stake in PTZ.

Rating components

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 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 PJSC Kirovsky Zavod was published by ACRA for the first time on November 5, 2019. The credit rating of PJSC Kirovsky Zavod 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 the data provided by PJSC Kirovsky Zavod, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and PJSC Kirovsky Zavod participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by PJSC Kirovsky Zavod in its financial statements have been discovered.

ACRA provided no additional services to PJSC Kirovsky Zavod. No conflicts of interest were discovered in the course of credit rating assignment.

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