ACRA upgrades RKS-Holding LLC to A+(RU), outlook Stable

The credit rating of RKS-Holding LLC (hereinafter, the Company, or the Group) has been upgraded to reflect a positive trend in the operating performance of the Company in 2018–2019 and H1 2020, including a sustainable improvement in the following indicators: FFO before net interest payments and taxes from RUB 4.4 bln in 2017 to RUB 5.5 bln in 2019; FFO margin before net interest payments and taxes from 18.9% in 2017 to 22.2% in 2020 (according to IFRS statements for H1 2020); a moderate decline in the coverage from 1.58x in 2017 to 0.84x in 2019; payment collection rate from 98.1% in 2019 to 99.1% in 2020. The Agency looks positively at a concession agreement made in the Khanty-Mansiysk Autonomous Okrug – Ugra in 2020.

The Company is one of the largest utilities operators in Russia, providing water supply and water sewage services, its key business, as well as heating and electric power supplies. The Company provides its services in nine regions of Russia, including Amur Region, Tambov Region, Ulyanovsk Region, Penza Region, Kirov Region, Perm Krai, the Republic of Karelia, and Khanty-Mansiysk Autonomous Okrug – Ugra. The Company consists of companies operating on the basis of lease and concession agreements and other operating assets supporting its activities. Currently, the Company is actively digitalizing its billing and operating procedures. The Company is owned by PJSC T Plus.

The credit rating is based on the Company’s very low industry risk, strong market position, medium business profile assessment, good profitability and liquidity, and adequate cash flow. The rating is limited by the Company’s medium business size as well as regulatory risks.

Key rating assessment factors

The profitability is good and price risks are low. The Company provides services in the segment of natural monopolies. There is almost no competition in the utilities sector, prices for services are relatively predictable, and demand is inelastic and responds very little to price changes. ACRA believes that the Company’s position can be strengthened by increasing the share of regions in the revenue structure where concession agreements are concluded between local authorities and the Company. ACRA believes this could reduce the risk of needed to replace operators of water supply and water sewage infrastructure. These regions currently account for less than 50% of the Company’s total revenue for 2019. Sales risks are associated with consumer non-payments. According to ACRA, the Company operates in regions with moderate levels of socio-economic development. The Company’s return on FFO before interest payments and taxes was 20% in 2017–2018. ACRA expects the average annual value of this figure to drop to 18% in 2020-2022 due to the Company’s expense growth outpacing its revenues, whose amount depends on tariffs subject to state regulation. According to results for 2019, the Company’s revenue increased by 8.7% y-o-y and amounted to RUB 26.9 bln, which was due to an increase in tariffs for water supply and water sewage, as well as an increase in revenues from non-core sources of income. ACRA expects the Company’s revenues for 2020 to decrease by 4.2% y-o-y to RUB 25.8 bln due to a withdrawal of an electricity company from the Group. The bill collection rate in 2020 amounted to 99.1% thanks to the Company's efforts to push down overdue receivables.

The investment commitments are moderate. In 2019, the Company’s investments to maintain existing production assets increased by 3.2% y-o-y and amounted to RUB 2.5 bln excluding VAT (RUB 2.4 bln excluding VAT in 2018). Current capital investments are aimed at reconstructing, modernizing, and technically re-equipping water supply and water sewage systems managed by the Company in order to improve their reliability and efficiency. The Company’s investment to revenue ratio equaled 10% for 2019, comparable to 2018. ACRA expects the Company’s investment volume to grow in 2020–2022, averaging RUB 3.2 bln annually (12% of revenue). ACRA currently assesses the depreciation of the Company’s fixed assets as moderate.

The free cash flow is adequate. According to results for 2019, the Company’s free cash flow (FCF) remained at the level of 2018 (RUB 1.6 bln). In 2020-2022, due to increased investment activity, ACRA expects the average annual FCF to decrease but remain positive.

The low leverage and good liquidity. As of January 1, 2021, the Company’s debt portfolio amounted to RUB 4.4 bln. Most of the Company’s debt is due in 2022. The debt consists of bank loans, which are mainly long-term and denominated in rubles. A part of the debt portfolio (44%) falls on a single lender. ACRA expects the Company’s total debt to remain unchanged in 2021-2022.

ACRA assesses the Company’s liquidity as good. As of January 1, 2021, the Company's accounts had accumulated RUB 1.9 bln. The Company also has free credit limits totaling RUB 4 bln.

Key assumptions

  • Average tariff indexation at 4% in 2020-2022;
  • Timely implementation of the capital development program;
  • Maintaining current leverage (total debt to FFO before net interest payments less than 2.0x);
  • Maintaining current access to external sources of liquidity.

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 annual weighted average FFO before interest payments and taxes growing up and staying stably above RUB 30 bln, and the annual weighted average FFO margin before net interest payments and taxes growing up and staying stably above 25%, coupled with significant increase in the scale of business;
  • The annual weighted average FFO margin before net interest payments and taxes growing up and staying stably above 25%, coupled with the annual weighted average ratio of total debt to FFO before interest payments declining and staying stably below 1.0x and the annual weighted average ratio of FFO before net interest payments to interest payments growing up and staying stably above 10.0x;

A negative rating action may be prompted by:

  • Decrease in the weighted average annual FFO before net interest payments and taxes below RUB 0.5 bln;
  • Decrease in the weighted average annual FFO margin before net interest payments and taxes below 15%;
  • Significant reduction in the scale of business;
  • Increase in the ratio of total debt to FFO before net interest payments above 4.0x;
  • Decrease in the ratio of FFO before net interest payments to interest payments below 5.0x;
  • Significant deterioration in the access to external sources of liquidity.

Rating components

SCA: а+.

Adjustments: none.

Support: none.

Issue ratings

There are no outstanding issues.

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 for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of RKS-Holding LLC was published by ACRA for the first time on March 27, 2018. 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 based on data provided by RKS-Holding LLC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and RKS-Holding LLC participated in its assignment.

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

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

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