ACRA assigns AA-(RU) to JSC «UEC», outlook Stable

ACRA has assigned a credit rating to JSC «UEC» (hereinafter, the Company) based on the Company’s high level of systemic importance for the Russian Federation and the very high level of state influence on the Company.

The Company’s standalone creditworthiness assessment (SCA) is based on an average market position, strong business profile, as well as the Company’s large size and high profitability. The SCA is limited by the Company’s average leverage and liquidity, as well as its weak cash flow.

The Company is a state holding company, which consolidates enterprises that develop, test, and produce gas turbine aircraft engines, helicopter engines, rocket engines, ground-based gas turbine installations for the oil and gas industry, as well as marine gas turbine engines. The Company’s controlling shareholder is Rostec State Corporation (AAA(RU), outlook Stable), which owns 91.5% of the Company’s shares. The state owns 6% via The Federal Agency for State Property Management, while the remaining 2.5% is owned by JSC “Russian Aircraft Corporation “MiG.”

Key rating assessment factors

The Company’s high level of systemic importance and the very high level of state influence on the Company are due to the Company's production of unique military products, the critical nature of the defense industry’s responsibility to ensure national security, as well as the lack of alternative suppliers in this segment. The Company’s enterprises execute contracts under state defense orders, military-technical partnerships, and federal target programs. These enterprises employ unique technologies for the production of gas turbine engines, which are in demand both in the domestic and global markets. In addition, they produce products under international contracts, and failure to fulfill these contracts could lead to financial losses for the state, as well as political and reputational risks. The company consistently receives direct state support in the form of co-financing for its investment program, state guarantees, and subsidized interest rates on bond loans.

The Company boasts a strong business profile and high geographical diversification. The Company’s highly stable revenues and contract base are based on a predictable client base (despite the small proportion of long-term contracts in the total portfolio), which is due to demand for leading Russian military aircraft and helicopters. ACRA’s assumption that the Company’s enterprises will reduce their shipments of military products to the domestic market is based on the Russian military aviation fleet renewal program ending in the coming years. However, ACRA does not expect a significant drop in demand for the Company's products from international players in the coming years. The Company generates more than half of its revenue from international orders, with a certain concentration on the largest foreign customers. The Company plans to increase shipments of civilian products, including energy and industrial gas turbine engines.

ACRA assesses the Company’s leverage and debt service as average. According to ACRA, average weighted total debt to FFO before net interest payments and average weighted total debt to capital should amount to 3.4x and 0.9x, respectively, for 2017-2022. This indicates average leverage. The Company does not depend heavily on its largest creditors, as the largest of which accounts for 30.8% of the debt structure. Average weighted FFO before net interest payments to interest payments (including subsidies) should amount to 3.4x in 2017-2022, indicating average debt service.

The Company’s cash flow is weak, while its liquidity is average. Significant investment program expenses1 necessary for the development and deployment of new engine models, as well as dividend payments expected at 50% of net profit, significantly limit the Company’s FCF. According to ACRA, the Company's return on FCF will amount to -9% in 2020, followed by positive figures in 2021-2022 due to lower capital expenses and increased operating flows. ACRA notes that debt repayments will peak in 2020, amounting to about RUB 97 bln. The Company's liquidity is supported by access to external sources of liquidity in the form of available credit lines, which, according to ACRA, currently amount to RUB 112 bln.

The Company boasts high profitability and large size. The Company’s average weighted figures for revenues and FFO before net interest payments and taxes amount to RUB 261.7 bln and RUB 58.6 bln, respectively, for 2017-2022. The Company expects revenues to grow due to the increased sales of civil segment products, as new engine models have hit the market. ACRA notes that there are certain operational and technical risks in implementing such a strategy and predicts more conservative prerequisites for revenue growth. In addition, ACRA expects the Company to maintain its current military-focused structure. An increase in shipments of military engines to the international market could provide more revenue growth. The Company achieves its high profitability (average weighted return on FFO before interest payments and taxes at 22.4%) via its pricing policy and cost optimization.

 

1 Capital expenses to revenue is expected to be 12% in 2020, followed by a decrease to 5-6% in 2021-2022.

Key assumptions

  • Implementing the capital investment program in the amount of RUB 96.5 bln in 2019-2021;
  • No sharp drops in demand for the Company's products in the domestic and foreign markets;
  • No significant price fluctuations in the Company's products;
  • Maintaining high product quality with no significant technical problems with engines, which could lead to a decrease in the contract base and reputational risks.

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:

  • Increased systemic importance and significantly increased state support.

A negative rating action may be prompted by:

  • Significantly decreased systemic importance.

Rating components

SCA: a-.

Adjustments: none.

Support: state — on par with the RF minus 3 notches.

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, the Methodology for Analyzing Relationships Between Rated Entities and the State, 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 JSC «UEC» 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 JSC «UEC», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and JSC «UEC» participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by JSC «UEC» in its financial statements have been discovered.

ACRA provided no additional services to JSC «UEC». No conflicts of interest were discovered in the course of credit rating assignment.

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