ACRA assigns BBB+(RU) to JSC MaximaTelecom, outlook Stable

The credit rating assigned to JSC MaximaTelecom (hereinafter, the Company) is based on the Company’s high leverage, average cash flow, and average liquidity. The rating is supported by a strong business profile, high profitability, and operations in regions with a high level of development.

The Company specializes in projects for the digitalization of urban infrastructure, mainly in the field of transport. Among the Company’s largest projects is the creation and further operation of the Wi-Fi network in the Moscow metro. The Company monetizes its own and partner Wi-Fi networks by selling ads displayed to network users. The Company’s main owners are a group of investors headed by Sergey Aslanyan.

Key rating assessment factors

High leverage. The Company’s leverage was extremely high until 2019. With the growth of revenue and the business as a whole (secured by high leverage), the debt level has decreased gradually, and at the end of 2018, the ratio of total debt to FFO before interest payments was 4.0x. Given the decline in FFO last year, ACRA assumes this ratio will grow to 6.5x for 2019 but expects it to return to 3.5-4.1x in 2020-2021, which still characterizes the Company’s leverage as high. According to ACRA, interest payment coverage is low. FFO before interest payments to interest payments should be 1.3x for 2019 and 2.0-2.5x for 2020-2022. The Company’s debt consists of ruble loans primarily at a floating rate.

Strong business profile. The Company’s operations are concentrated in two relatively independent areas, advertising and digitalizing urban infrastructure. ACRA notes the high concentration of the Company’s infrastructure business on its key client, the city of Moscow. In addition, ACRA believes the Company’s extensive experience in implementing projects to automate various city services correctly positions it in the market of digital transformation solutions. According to ACRA, Moscow and other major cities will invest significantly in digitalization in the coming years, which has a positive impact on the prospects of this market. The internet advertising market has shown high growth rates in recent years. If favorable macroeconomic conditions continue, it could increase 10-12% annually over the next 2-3 years. In 2019, the Company established a joint venture with JSC “Gazprom-media Holding” aimed at improving the performance of both companies in the internet advertising market.

The Company’s activities are concentrated in regions that are favorable for its business. The majority of revenue comes from projects in Moscow (AAA(RU), outlook Stable), and its subsidiary in Saint Petersburg (AAA(RU), outlook Stable) has contributed part of the Company’s revenue after launching the Wi-Fi network in the Saint Petersburg metro.

Average liquidity with average cash flow. The peak of the Company’s capital expenses has already passed and according to ACRA, the CAPEX to revenue ratio for 2019 amounts to 11% (14% in 2018). ACRA expects a further decrease to 5-10% in 2020-2022. The reduction in capital expenses could bring free cash flow (FCF) into positive figures in 2021-2022. Negative FCF in 2019-2020, as well as significant debt repayments in 2020 and 2022, put substantial pressure on the Company’s liquidity assessment. Liquidity is supported by a substantial amount of open credit lines.

High profitability and small company size. Based on conservative assumptions, ACRA took into account only those projects for which agreements have already been signed into its forecast model. According to preliminary management reports, the Company’s revenue for 2019 equals RUB 6 bln, which is 57% higher than last year. The growth in revenue was primarily driven by infrastructure projects and ACRA believes that this will remain a driver of revenue growth in 2020. Returns on FFO before interest and taxes are significantly affected by infrastructure projects that are less marginal than the advertising business. In 2016-2018, when the share of the advertising business was close to 100%, returns on FFO stood at 18-27%. In 2018, the Company completed the first stage of a highly marginal project, with the second part of this project being rescheduled for 2020. According to ACRA, FFO before interest payments and taxes could decrease by 15-20% to RUB 700-800 mln for 2019, while profitability could increase to 15%. After revenue stabilizes in this area, ACRA expects profitability to recover to 20-22% and FFO before interest payments and taxes to increase to RUB 1.0-1.5 bln in 2020-2022.  

Average corporate governance. ACRA assesses the Company’s strategy as positive. The Company regularly reviews its strategic plans and shows no significant deviations from its stated priorities. However, ACRA considers the Company’s corporate governance and risk management to be average. The structure of the Company’s group is quite simple, which positively affects the rating. The Company’s information transparency is assessed as average. The Company’s IFRS reports are prepared twice a year by KSK Audit and are not published and operating indicators are not publicly available either.

Key assumptions

  • Average annual revenue growth from advertising at 10% in 2020-2022 while maintaining current profitability;
  • Growth in revenue from infrastructure projects to RUB 4-6 bln in 2020 while maintaining a comparable level in 2021-2022;
  • Positive FCF starting in 2021.

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:

  • Increase in FFO before interest payments to interest payments above 2.5x;
  • Reduction in total debt to FFO before interest payments below 2.0x;
  • Increase in returns on FCF above 2%;
  • Easier debt repayment schedule with improved access to external liquidity sources;
  • Future improvement in corporate governance practices.

A negative rating action may be prompted by:

  • Increase in total debt to FFO before interest payments above 5.0x;
  • Reduction in FFO before interest payments to interest payments below 1.0x;
  • Reduction in returns on FCF below 8%;
  • Reduced access to liquidity sources.

Rating components

SCA: bbb+.

Adjustments: none.

Regulatory disclosure

The credit rating has been assigned to JSC MaximaTelecom 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.

A credit rating has been assigned to JSC MaximaTelecom 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 the data provided by JSC MaximaTelecom, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and JSC MaximaTelecom participated in its assignment.

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

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

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