ACRA upgrades PJSC Samolet Group to A-(RU), changes outlook to Stable

The credit rating of PJSC Samolet Group (hereinafter, the Company, the Group, or Samolet) has been upgraded based on improved leverage and coverage indicators due to significant price growth in the primary residential real estate market in 2020. In ACRA’s opinion, in recent years the Company has made significant efforts to scale up its business and strengthen its corporate governance system and management team. The Company demonstrates its commitment to the chosen trajectory of growth and has maintained a high level of financial discipline despite the changing market situation and external challenges. The Company’s credit rating stems from its strong business profile, high business profitability, high corporate governance quality, strong liquidity, very low leverage, and very high coverage. At the same time, the very high industry risk, and average assessment of cash flow and size put pressure on the Company’s credit rating.

Samolet is one of the leaders of the real estate market in the Moscow Region and the New Moscow area. Most of the Company’s projects are integrated development projects. According to the Unified Registry of Developers, the Company’s current construction portfolio amounts to 1.46 mln sq. m (as of the start of January 2021).

Key rating assessment factors

Industry risk is assessed as very high due to the pronounced cyclical nature of the construction industry, high amount of overdue payments, and substantial number of companies that have defaulted over the last five years. Therefore, industry risk is a strong factor that limits the Company’s credit rating.

Strong business profile. The Company’s strong business profile is based on a very highly diversified project portfolio and a stable project completion timeline. ACRA notes an increase in the diversification of the portfolio of projects by class over the past three years. The Company is a leader in housing construction in the Moscow area.

Higher profitability and volume of sales. The average sale price for real estate constructed by the Company grew by more than 20% in 2020 compared to 2019. At the same time, there was a slight increase in sales in physical terms. ACRA estimates the gross profitability of the Company at 22% in 2020, compared to 19.6% in 2019. However, due to the specifics of revenue and cost accounting, the price increase in 2020 will only be reflected in full in the Company’s profitability indicators in 2021. ACRA expects the Group’s gross profitability to approach 30% by the end of this year.  The advantages that the Company has received from the consolidation of the market will fully manifest themselves in the forecast period. As early as 2022, the Company can expect more than twofold growth in sales in physical terms compared to 2020 thanks to the launch of new projects and new stages in old projects. Samolet will continue to be one of the main beneficiaries of the government’s measures to support the construction industry. The Company also remains one of the biggest beneficiaries of social support measures such as increasing the size of maternity capital and the introduction of maternity capital payments following the birth of the first child.

Very low leverage and very high debt service indicators. When calculating the ratio of net debt to FFO before interest payments, ACRA adjusted the total debt raised for escrow account project finance by the size of funds held on buyers’ escrow accounts. The weighted average ratio of net debt to FFO before net interest payments for 2018–2023 is estimated by ACRA at 0.94x.

When assessing coverage, ACRA includes interest payments on corporate debt as interest payments, while payments on escrow account project debt are included in the cost price. According to ACRA, the weighted average ratio of FFO before net interest to net interest for the same period is 8.2x.

Average cash flow assessment. In 2020, the Company adopted a dividend policy that envisages annual dividend payouts of no less than RUB 5 bln starting from 2021. This has had a negative impact on the weighted average FCF indicator. At the same time, ACRA does not expect the payment of dividends to negatively impact the Company’s credit quality amid very low leverage, very high coverage and strong liquidity. Therefore, the Company’s cash flow is assessed as average according to the methodology.

Key assumptions

  • Maintaining planned construction deadlines and sales rates;
  • ACRA only took into account only projects under construction and projects expected to be completed in accordance with the Company’s current plans;
  • No significant decline in prices in the primary real estate market of the Moscow area.

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:

  • Weighted average FFO profitability before net interest payments and taxes exceeding 20%;
  • Weighted average FCF profitability exceeding 5%.

A negative rating action may be prompted by:

  • Weighted average ratio of net debt to FFO before net interest payments increasing above 2.0х at the same time as the weighted average ratio of FFO before net interest payments to net interest payments falling below 5.0x;
  • Decrease in residential real estate prices by more than 15% in the Moscow area amid unchanged costs of construction work and materials in 2020–2023;
  • Regulatory changes capable of having a material adverse effect on the Company’s performance.

Rating components

SCA: а-.

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 Samolet Group was published by ACRA for the first time on July 10, 2018. 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 the data provided by PJSC Samolet Group, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and PJSC Samolet Group participated in its assignment.

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

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

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