The credit rating of PJSC Samolet Group (hereinafter, the Company, the Group, or Samolet) is based on the Company’s strong business profile, high business profitability, high corporate governance quality, strong liquidity, and low leverage. At the same time, the very high industry risk, weak cash flow assessment, and average indicators for the size and coverage of debt put pressure on the Company’s credit rating. The credit rating outlook has been changed to Positive to reflect ACRA’s expectations of improved leverage and debt service indicators.
Samolet is one of the leaders of the real estate market in the Moscow Region and the New Moscow area. Most of the Company’s projects are integrated development projects. According to the Unified Registry of Developers, the Company’s overall project portfolio exceeds 12 mln sq. m, and the current construction portfolio amounts to 1.28 mln sq. m (as of the start of July 2020).
Key rating assessment factors
Industry risk is assessed as very high due to the pronounced cyclical nature of the construction industry, high amount of overdue payments, and substantial number of companies that have defaulted over the last five years. Therefore, industry risk is a very strong factor that limits the Company’s credit rating.
Strong business profile. The Company’s strong business profile is based on a very highly diversified project portfolio and stable project completion timeline. ACRA notes an increase in the diversification of the portfolio of projects by class over the past three years. The Company is a leader in housing construction in the Moscow area.
Lower profitability and the impact of the crisis. According to ACRA, the Company’s weighted average FFO before interest and taxes is expected to be 12.5% in 2017–2022. In 2019, the Group continued to broaden its project portfolio. However, these new projects have not yet led to growth in FFO. Furthermore, the Company’s profitability has fallen due to the nature of the recording of revenue and costs, including as a result of an increase in the share of commercial and administrative expenses in revenue. At the same time, in 2019 and H1 2020, the average selling price of the Company’s real estate continued to grow: in H1 2020 this growth amounted to 17% compared to the same period in the year before. ACRA expects the average selling price to continue growing in 2021–2022 thanks to changes in the project portfolio, which when coupled with the increase in the share of new projects in the Company’s revenue should allow the Company to significantly increase its FFO margin before interest and taxes in the same period.
In ACRA’s opinion, the current crisis has a limited impact on the Company’s operations. High sales in Q1 2020 considerably softened the impact of declining sales in April and May, and sales began to recover in June. In H1 2020, sales were close to the pre-crisis targets, with growth in prices exceeding targets. In ACRA’s opinion, Samolet will be one of main beneficiaries of the government’s measures to support the construction industry (mainly due to subsidized mortgages). The Company is also one of the biggest beneficiaries of social support measures such as increasing the size of maternity capital and the introduction of maternity capital payments following the birth of the first child: the share of transactions using maternity capital in the Company’s sales increased from 0.9% in January this year to 6.1–7.9% in May–June.
Low leverage and average debt service indicators. The Company recorded a large increase in leverage in 2019, with general corporate debt growing by more than threefold in connection with the expansion of the project portfolio and the substitution of accounts payable for land with loans secured by land plots because transactions were performed to purchase land plots for existing projects with discounts of up to 30% (previously, payments for land were made in installments). In its calculation of the ratio of net debt to FFO before interest and taxes, ACRA adjusts the total debt for the amount of borrowed funds fully secured by funds held on escrow accounts and raised from homebuyers. Subject to this adjustment, the weighted average ratio of net debt to FFO before net interest is estimated at 1.2x for 2017–2022. According to ACRA, the weighted average ratio of FFO before net interest to net interest for the same period is 5.4x. ACRA expects a marked improvement in leverage and debt service indicators as revenue from new projects is reported.
Key assumptions
- Maintaining planned construction deadlines and sales rates;
- ACRA only took into account only projects under construction and projects expected to be completed in accordance with the Company’s current plans
- No significant price changes in the primary real estate market of the Moscow area.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Weighted average ratio of net debt to FFO before net interest falling below 1.0x;
- Weighted average FCF margin exceeding 5%.
A negative rating action may be prompted by:
- Weighted average ratio of net debt to FFO before net interest increasing above 2.0х at the same time as the weighted average FCF margin falling below 0%;
- Decrease in residential real estate prices by more than 15% of the Moscow area amid unchanged costs of construction work and materials in 2020–2021;
- Regulatory changes capable of having a material adverse effect on the Company’s performance.
Rating components
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 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 PJSC Samolet Group was published by ACRA for the first time on July 10, 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 was assigned based on the data provided by PJSC Samolet Group, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and PJSC Samolet Group participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by PJSC Samolet Group in its financial statements have been discovered.
ACRA provided no additional services to PJSC Samolet Group. No conflicts of interest were discovered in the course of credit rating assignment.
