ACRA assigns BB+ to JSC Samruk-Kazyna Construction, outlook Stable, under the international scale

The credit rating of JSC Samruk-Kazyna Construction (hereinafter, the Company. Previously JSC “Real Estate Fund Samruk-Kazyna”) under the international scale is based on the Company’s standalone creditworthiness assessment (SCA) at b+, its high level of systemic importance to the Republic of Kazakhstan (ACRA rating under the international scale BBB+, outlook Negative, hereinafter, Kazakhstan), and a very strong degree of state influence on the Company’s activities, including shareholder and operational control by JSC “National Welfare Fund” Samruk-Kazyna (hereinafter, the Shareholder). The Shareholder is wholly owned by the Government Kazakhstan. Given the abovementioned factors, the Company’s rating is set at BB+.

The SCA reflects the Company’s small business size (annual revenue less than USD 1.5 bln), weak market position (not among the top five players in the national residential market), and high dependence on counterparties. The Company’s financial risk profile is characterized by high leverage and average interest payment coverage. However, ACRA notes the Company’s high profitability and high level of liquidity.

The Company is an operator of state programs in the field of residential and commercial real estate. In 2015−2019, the Company continued to work on an anti-crisis program, under which it was obligated to complete the construction of 21 facilities totaling KZT 83.5 bln in Nur-Sultan and Almaty, as well as in the Almaty region. In 2012, the Company was designated as an operator of the state program for regional development until 2020 (Nurly Zher residential construction program focused on rental housing with purchase). As of December 31, 2019, under this program, the Company received KZT 94.7 bln in credit funds from the Shareholder, of which KZT 21.2 bln was repaid (on and/or ahead of schedule). In 2016, the Company was designated as an operator to support private developers of commercial housing under the Nurly Zhol program (later the Nurly Zher residential construction program focused on commercial housing), which was completed in 2018.

Key rating assessment factors

High level of systemic importance and very strong state influence. The Company was established according to Kazakhstan Government Decree No. 265, dated March 6, 2009, “On certain measures to solve problems in the real estate market.” Its activity started as part of a joint action plan between the Government of Kazakhstan, the National Bank of the Kazakhstan, and the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan, which was focused on stabilizing the economy and financial system in 2009−2010. The plan was approved by a Government Decree dated November 25, 2008, in order to stabilize the real estate market by purchasing residential and non-residential premises in construction projects and ensuring their effective management. The Company is the only operator of state programs for the development of the real estate market through preferential credit lines provided by the Shareholder, the purpose of which is primarily to provide affordable housing for socially vulnerable segments of Kazakhstan’s population.

In terms of government influence on the Company’s operations, ACRA notes the Shareholder’s operational and shareholder control through representatives on the Company’s Board of Directors. In addition, the shareholder has provided financial support to the Company since its inception. However, ACRA notes the potential risk of reduced shareholder support in the future due to the gradual completion of state programs.

Weak business profile compared to global construction companies. The weak market position is primarily due to the Company’s small share in the national housing market. Currently, the main goal of the Company is to implement state programs, whose successful completion indicates the consistency of the Company’s strategy. The Company’s operating performance is usually predictable and stable, primarily due to rental income from residential and commercial real estate. However, financing and construction of facilities under the main state programs is currently completed. In addition, the Company plans to develop its own residential real estate projects on a market basis, which makes the Company’s financial results less predictable.

Because the Company implements state programs for the development of the residential and commercial real estate market, its activities primarily consist in evaluating, selecting, and supervising projects. Therefore, the Company is currently completely dependent on contractors, which creates risks of project delays and budget deviations. ACRA notes that previously there were no significant budget deviations because when concluding contracts, the cost and volume of the Company’s investments were determined in advance, as well as fines and penalties, which allowed it to compensate for any deviations from the specified parameters.

Financial policy and corporate governance. ACRA evaluates the Company’s financial policy as average. The assessment is based on a significant amount of dividend payments (at the end of 2018, dividends amounted to about 25% of net profit). However, decisions on the amount of dividends paid are left to the Shareholder. ACRA assesses the Company’s corporate governance as below average compared to global peers. The Company builds its strategy based on the government’s plans to develop the real estate sector in Kazakhstan, as well as the Shareholder’s plans. The Company’s strategy is based on a five-year basis and adjusted if necessary. The Company has a Board of Directors, which consists of two Shareholder representatives and one independent member.

The Company’s financial transparency is average by international standards. The Company regularly publishes audited financial statements in line with IFRS, annual reports for investors, and periodically issues reviews of the situation in the real estate market in Kazakhstan.

Financial risk profile. The Company’s business size is small and measured by annual revenue in USD. The Company plans to develop its own projects, which, if successful, could have a positive impact on financial performance. To finance these projects, the Company plans to raise funds on a market basis. ACRA assesses the Company’s leverage as high. As of September 30, 2020, the Company’s total debt was KZT 87.8 bln. Of this sum, 85.9 bln was preferential credit lines (2% interest rate) from the Shareholder, which were used to implement state programs. ACRA estimates the weighted average ratios of total debt to EBITDA and total debt to equity for 2017−2022 at 17.8x and 2.6x, respectively. The debt from the Shareholder is long-term (repayment by 2032) and subject to gradual prepayment as funds are returned from state programs. Due to preferential interest rates, the weighted average coverage rate (FFO before interest payments to interest payments) is estimated at 2.3x, indicating average coverage.

ACRA notes the Company’s high EBITDA profitability, which is based on, among other things, a significant share of lease payments in revenue (26% for 2019). ACRA expects a gradual decline in this figure amid a reduction in the share of interest in payments under the program focused on rental housing with purchase.

According to ACRA, the Company’s liquidity is high. Credit lines are mainly represented by preferential loans from the Shareholder. The amount of available credit funds that can be used to additionally finance programs is KZT 45.2 bln. ACRA notes that in 2018, the Shareholder provided necessary liquidity to the Company by repurchasing its bond loan at a rate of 10% annually.

Key assumptions

  • Lease payments under the program focused on rental housing with purchase as planned;
  • Maintaining the long-term structure of preferential credit lines from the Shareholder;
  • Maintained status as an operator of real estate market support/development programs in Kazakhstan.

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:

  • Decrease in leverage (total debt to EBITDA) below 8.0x combined with a decrease in total debt to equity below 2x;
  • Significantly improved market position;
  • Increase in coverage (FFO before interest payments to interest payments) above 5x.

A negative rating action may be prompted by:

  • Drop in EBITDA profitability below 25%;
  • Maintained leverage above 8.0x combined with a decrease in total debt to equity below 2x;
  • Reduced liquidity due to difficulties in accessing debt financing sources;
  • Loss of status as an operator of real estate market support/development programs in Kazakhstan.

Rating components

SCA: b+.

Adjustments: SCA + 3 notches.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was assigned under the international scale based on the Methodology for Assigning Credit Ratings to Non-financial Corporations under the International Scale, Methodology for Analyzing Relationships Between Rated Entities and the State under the International Scale, 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 Samruk-Kazyna Construction 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 Samruk-Kazyna Construction, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC Samruk-Kazyna Construction. The credit rating is solicited, and JSC Samruk-Kazyna Construction participated in its assignment.

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

ACRA provided no additional services to JSC Samruk-Kazyna Construction. No conflicts of interest were discovered in the course of the rating process.

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