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ACRA assigns BB+(RU) to PJSC Kirovsky Zavod, outlook Stable

ACRA has assigned a credit rating to PJSC Kirovsky Zavod (hereinafter, the Company) based on the Company’s moderate leverage, debt coverage, and business profile. The Company’s small size and weak corporate governance limit the rating.

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

The Company’s average business profile is characterized by the low long-term contract base as well as the increased volatility of sales in the Company’s enterprises. A production and sales plan is drawn up with JSC Peterburgsky Tractorny Zavod (hereinafter, PTZ) each year in December for the following year after consultation with dealers, which is a typical planning horizon for a company operating in the agricultural machinery segment. Rolled steel is sold in spot markets only, making this segment entirely dependent on market prices as well as fluctuations in supply and demand. Metallurgical products are sold only to external consumers and are not used by the Company’s machinery production enterprises. 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.

The poor corporate governance assessment is mainly due to a conflict between the Company’s management and a group of minority shareholders. This led to a number of lawsuits filed between 2008 and 2013. There are currently no new lawsuits being filed but the overall conflict has not been resolved. In ACRA’s opinion, the shareholder conflict is one of the reasons for the concentration of managerial functions in the management Board. In addition, this assessment takes into account the fact that in early 2018 the Company entered into an option to sell 51% of PTZ to QUESTRA SOLUTIONS LTD with a maturity of 2019 (the ultimate beneficiary of the option’s buyer is unknown). Currently, the Company does not intend to sell a controlling stake in PTZ. However, in accordance with the desire of the buyer, the option will not be terminated, but extended (the new terms of implementation are still unknown). At the moment, ACRA believes that this option will most likely not be fulfilled in the near future. If this option is somehow implemented, it will negatively affect the assigned rating. The Company’s structure is moderately complicated due to the diversification of its activities.

Moderate competitive position in a fragmented market, less than average business size, and moderately high profitability. The main model produced by PTZ, the K-7 tractor, occupies a leading position in the articulated tractors segment with a capacity of more than 250 HP (65%). In general, however, the tractor market is fragmented.

The new K-4 model accounts for about 11-12% of sales in the 150-250 HP tractor segment. The company plans to increase its market share in this segment both in Russia and abroad. The concentration of both the energy and industrial engineering segments on 1-2 key products (leadership in a narrow product segment) may entail the need for a complete reorientation of products if relevant state programs are terminated. At the end of 2018, FFO amounted to RUB 2.6 bln, which, according to ACRA’s classification, 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 by LLC "NPO Laboratory of Special Steels and Alloys" (hereinafter, LSSA), which is part of the Company’s metallurgical segment. FFO profitability before interest and taxes for 2016-2018 ranged from 13-18%, which is a moderately high indicator for a company in the machinery segment. ACRA believes that the average FFO profitability before interest and taxes will be 14% for 2019-2021.

Average leverage and liquidity. At the end of 2018, the ratio of debt to FFO before net interest payments was 3.2x. A slight reduction in leverage to 2.7x is planned for 2019 due to revenue and FFO growth, which is moderate according to ACRA’s methodology. Leverage may continue to decline by 2021 if the Company does not launch any new major investment projects and the growth of capital expenses does not exceed 5% of revenue. Almost all of the Company's debt is denominated in rubles (98%). There is no bond debt, and 20% 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: by the end of 2020, the Company will have to repay 45% of its total debt. In ACRA's opinion, refinancing risk is acceptable given the Company's long experience of cooperation with its two main creditor banks (BANK "ROSSIYA" and Bank "Saint-Petersburg" PJSC) and the significant amount of credit lines available in these banks.

Key assumptions

  • Maintaining whole ownership over 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:

  • Improved corporate governance resulting from a resolution to the shareholder conflict and the restoration of the Board of Directors as an independent decision-making body;
  • 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 shareholder conflict;
  • 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 51% stake option with PTZ.

Rating components

SCA: bb+

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 has been assigned to PJSC Kirovsky Zavod 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 is 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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