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ACRA assigns BBB+(RU) to Samolet Group of Companies JSC, outlook Stable

The credit rating assigned to Samolet Group of Companies JSC (hereinafter, the Company or the Group) is based on the Company’s strong business profile and strong market positions, high business profitability, high corporate governance quality, strong cash flow, strong liquidity, very low leverage, and very high coverage. At the same time, the industry risk is very high, which puts pressure on the Company’s credit rating.

The Company is the second largest residential real estate developer in the Moscow region (by construction rates) and the fifth largest player in the Russian construction market (by size). The Company focuses on comfort class low cost housing, predominantly in the Moscow region and the New Moscow area, and it holds leading positions in the region in terms of its portfolio of projects. Most projects of the Company are integrated development projects. In 2018–2020, the Company is expected to complete 1.9 mln sq. m of floor spaces.

Key rating assessment factors

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

Strong business profile is based on the highly diversified project portfolio and the stable project completion timeline. The business profile assessment is restricted by the lack of own manufacturing facilities (in terms of ACRA methodology). The Company sales are supported by short project implementation periods and high price to quality ratios.

The Company’s strategy is implemented consistently, deviations are rare. According to ACRA estimates, the Company has been implementing its strategy successfully, and the existing risk management system allows the Company to control key operational and financial risks. Currency risks are absent, as the Company has no earnings or liabilities denominated in any foreign currency. In order to manage risks, the Company maintains a significant amount of free cash on its accounts. The Group’s management structure generally conforms to the best international practices. Three out of eight members of the board of directors are independent directors, including the chairman of the board. The Group’s structure is complicated, but this approach is economically justified and typical for the industry. The financial transparency of the Company is assessed as high.

High profitability is based on the Group’s ability to maintain sustainable sales rates and high construction rates. According to ACRA estimates, the Company’s average weighted FFO margin before interest and taxes is expected to be 17.8% for the period 2015–2020.

The leverage is very low and the coverage is very high because, when entering into new construction projects, the Company grants project shares to landowners instead of purchasing land (cash-free model).

Thanks to a substantial amount of free cash accumulated by the Company, its net debt equaled to RUB 1.05 bln in 2017, and it is expected to become negative in the future.

Strong liquidity is supported primarily by a significant amount of free cash held on the Company’s accounts and a comfortable debt repayment schedule. The amount of free cash accumulated by the Company exceeds the aggregate debt repayments expected in 2018–2020.

Key assumptions

  • The Company will maintain the planned construction and sales rates;
  • ACRA took into account only projects under construction and projects expected to be completed in accordance with the current plans of the Company;
  • Prices will not change significantly in the primary real estate market of Moscow region.

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:

  • The average weighted FFO before net interest and tax growing above RUB 30 bln, the average weighted ratio of debt to equity going below 0.5х, and FCF margin exceeding 10%.

A negative rating action may be prompted by:

  • The average weighted FFO before net interest to net interest going down below 8.0х;
  • The average weighted net debt to FFO before net interest going up above 1.0х;
  • The average weighted FFO margin before interest and tax going down below 15%;
  • Prices in the primary residential real estate market of Moscow region going down by more than 10% amid unchanged costs of construction work and materials in 2019–2020;
  • Regulatory changes able to affect the Company materially.

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 the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to Samolet Group of Companies JSC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (July 06, 2018).

The assigned credit rating is based on the data provided by Samolet Group of Companies JSC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Samolet Group of Companies JSC participated in its assignment.

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

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

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