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ACRA assigns BBB+(RU) to Soyuzdorstroy LLC (AVTOBAN GC), outlook Stable

The credit rating assigned to Soyuzdorstroy LLC (hereinafter, AVTOBAN GC, or the Company) rests upon the strong business profile and strong market positions of the Company. The rating is restricted by the Company’s medium size and medium financial profile. The Company belongs to the infrastructure construction industry, which also restricts the rating; however, ACRA notes that the road construction is the least risky segment in the industry.

AVTOBAN GC is the Russia’s largest road construction company, with the market share of 7.1%. In 2016, the Company constructed 147.7 km or motor roads, and the total amount of its backlog exceeds RUB 140 billion. About 90% of the Company’s revenue comes from governmental contracts; the Company also benefits from private-public partnerships, including concession agreements.

Key rating assessment factors

Strong business profile. AVTOBAN GC focuses on the construction of paved roads, and the Company has considerable experience in this field (SU-905 LLC, a subsidiary of AVTOBAN GC, has been operating since 1965). The portfolio of contracts shows that the Company is committed for the next four years. At the same time, ACRA notes the presence of a large customer/large project concentration risk, which accounts for 29% of revenue and 55% of backlog, respectively. The share of subcontracts is significant: 46% of the total contracts performed by the Company in 2016, which is explained by the Company coming to the concession market. The most non-concession projects may be constructed by the Company without subcontractors. The Company’s geography of presence is extensive and covers the most developed regions of the country (Moscow Region, Khanty-Mansiysk Autonomous Okrug-Yugra and others), and in the long term, the Company may enter the Moscow market.

Medium leverage and medium coverage. The Company’s debt under the concession agreements is considered by ACRA as separate from AVTOBAN GC. In accordance with the Concession Agreement, any concession loan shall be repaid in full if the concession is terminated for whatever reason. In addition, the concession terms contain no sureties supported by the Company’s operating assets for obligations of concessionaire companies (including ASK LLC, a part of AVTOBAN GC). In addition, the share of AVTOBAN GC in ASK LLC, according to the Company, would decrease from 75% in 2017 to less than 50% in 2018. At the same time, the junior debt attracted by AVTOBAN GC to participate as an investor in the concession project is estimated as a liability of the Company. According to ACRA estimates, the Company’s debt would amount to RUB 12.6 billion in 2017, but the debt would drop to RUB 7.2 billion by 2019. The leverage (total debt / FFO before net interest) of AVTOBAN GC would be 2.8x in 2017, and it would drop to 1.4x by 2019. The debt to equity ratio would decrease from 1.4x in 2017 to 0.5x by 2019. The debt repayment schedule is quite comfortable, as large repayments are expected to begin in 2019. The coverage is estimated by ACRA as medium; it would grow from 2.7x in 2017 to 5.2x in 2019.

Strong positions in the industry. At the end of 2016, the Company’s FFO before net interest and taxes amounted to RUB 3.6 billion, and, according to Company estimates, its value would exceed RUB 5 billion by 2019. The total amount of the Company’s backlog is RUB 147 billion, which corresponds to a ‘high’ assessment for this factor. In the forecast period, the Company’s FFO margin before interest and taxes would remain at 11% (same as in 2016), which is high enough as compared to peers.

Strong liquidity position amid weak cash flow. Considering the significant cash balances on the Company’s accounts, as well as undrawn credit lines (over RUB 4 billion), ACRA expects the Company’s short-term liquidity ratio to be 1.9x in 2017–2019. Qualitative liquidity assessment is high: the Company can attract funding in the Russian market, and until 2019, it would not be required to make large debt repayments. The Company’s cash flow would be weak, which is caused by capital expenses aimed at purchasing new equipment for the construction of Phase No. 3 of the Central Ring Road (TsKAD), and dividend payments amounting to 20% of net profit.

Adequate corporate governance. The Company’s strategy is conservative and includes large and profitable projects. The Company has been actively developing concession and PPP projects. The Company’s financial risk management policies are determined annually by the board of directors of DSC AVTOBAN (a part of AVTOBAN GC) and the key beneficiary. The exposure to currency and interest risks is low. AVTOBAN GC includes a significant number of legal entities, which is caused by the business specifics. At the same time, there have been no intra-group cash flows between such entities. The Company issues annual reports (non-public) audited by an international audit company.

Key assumptions

  • Annual revenue from projects to grow by 8.5%;
  • Dividend payments within 20% of net profit;
  • Implementation of the RUB 1.5 billion annual investment program and no need to raise funding.

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:

  • Average FFO margin before interest and taxes growing above 12% amid FFO before net interest and tax growing above RUB 5 billion;
  • Average FCF margin growing above 2.5%;
  • Average FFO before net interest/interest growing above 8х.

A negative rating action may be prompted by:

  • Average FFO margin before interest and taxes going below 3%;
  • Average total debt / FFO before net interest growing above 3.5х amid average FFO before net interest/interest going below 2.5х;
  • A substantial deterioration of access to external sources of liquidity.

Rating components

  • Standalone creditworthiness assessment (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 and is 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to Soyuzdorstroy LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 28, 2017).

The assigned credit rating is based on the data provided by Soyuzdorstroy LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is assigned on the basis of the consolidated IFRS financial statements of Soyuzdorstroy LLC. The credit rating is solicited, and Soyuzdorstroy LLC participated in its assignment.

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

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

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