The credit rating of Abrau-Durso PJSC (hereinafter, Abrau-Durso, or the Company), a head company of a group, reflects the strong market position of the Company, which is the leader in the Russian sparkling wine market, and also takes into account the measures taken by the state to promote viticulture and winemaking in Russia. The credit rating also takes into account the medium business profile assessment, which is associated with positive trends in the demand in the Company's key market, medium product diversification, and the availability of a moderate number of substitute products on the market. ACRA takes into account the degree of the Company's vertical integration, which, in the Agency's opinion, has a positive effect on the Company's business profile. The rating is constrained by the small size of the Company and the low assessment of free cash flow (FCF).
Abrau-Durso is a Russian producer of sparkling wines. In 2020, the Company took the first place in Russia by the volume of produced sparkling wines. Abrau-Durso has three production assets in the Krasnodar Krai (Abrau-Durso Russian Wine House, Loza Winery, Yubileinaya Winery) and one production asset in the Rostov Region (Vedernikov Winery). Abrau-Durso produces sparkling wines using the classic champagne technology and the Charmat method, as well as still wines, cider, spirits, soft carbonated drinks, and artesian water. In addition, the Company is the official and exclusive distributor of the international brands Mionetto Prosecco, Henkell, and Freixenet. In 2020, the Company's total sales amounted to 41 million bottles.
KEY ASSESSMENT Factors
Strong market position and very high geographic diversification. Abrau-Durso ranks first in the production of sparkling wines in Russia. The Company's market position is also supported by the legislation of the Russian Federation, which is aimed at the development of domestic winemaking. The Company participates in state programs for the support and development of the agro industry and winemaking, which allows it to partially compensate for the costs of planting and receive subsidized loans in accordance with Decree of the Government of the Russian Federation No. 1528. In 2020, Federal Law No. 468-FZ “On viticulture and winemaking in the Russian Federation” came into force, which limited the use of imported wine material in the production of Russian wines, including sparkling wines. Therefore, companies having their own vineyards gained a competitive advantage in the Russian market for sparkling and still wines. Abrau-Durso has 3,400 hectares of vineyards and 6,800 hectares of vineyard land in four main locations (Abrau-Durso, Anapa, Taman Peninsula, and Vedernikov). In 2020, the Company acquired the Yubileinaya winery, which contributed to an increase in the production of the Company's own grapes and allowed it to reduce the volume of wine materials purchased on the market. In this regard, ACRA positively assesses the Company's position on the Russian sparkling wine market in the future. The Agency notes a very high level of geographic diversification: Abrau-Durso wines are sold throughout Russia; in 2020, the Company also exported 1.2 mln bottles (2.8% of total sales).
Medium business profile assessment. ACRA notes market trends positive for the Company, which is associated with both changes in legislation, which in turn had a negative impact on those industry players who previously imported wine materials for their own production, and the development of the Company of its own promising product lines. The Agency notes the medium level of the Company's product diversification. The main products of Abrau-Durso are premium, sub-premium and standard sparkling wines. At year-end 2020, the share of proceeds from sparkling wines amounted to 80%, the remaining share came from Abrau Light drinks, still wine, and other products of the Company. ACRA notes a moderate assessment of substitute products on the market, which is due to the strong brand of the Company, which is nevertheless limited by the availability of a wide range of competitive products.
High level of corporate governance. ACRA notes that the Company has key management bodies, as well as policies and formalized procedures for making management decisions. The Agency positively assesses the Company's development strategy, taking into account the strengthening of vertical integration and the expansion of its own product line of Abrau-Durso products. Risk management is assessed by the Agency as high: the Company insures key risks and has formalized standards for various types of risks. The structure of the Company's group is complicated, there are some related-party transactions, but they are economically justified. Financial transparency of Abrau-Durso is high, and the Company prepares its IFRS financial statements on an annual and semi-annual basis, the auditor is BDO.
Medium leverage and high interest coverage. As of July 1, 2021, the total financial debt was RUB 6.7 bln and included bank credit lines, credit lines granted under the Ministry of Agriculture Program No. 1528 (interest payments are subsidized by the state), and loans from related parties. According to ACRA's calculations, the Company's weighted1 ratio of total debt to FFO before net interest was 2.7x, and the weighted ratio of FFO before net interest to interest exceeded 5.0x.
1 Weighted values are calculated using the historic data and ACRA's forecasts.
Small size and very high profitability of the Company. In 2020, the Company's revenue increased by 9.4% to RUB 10 bln, excluding VAT (RUB 9.2 bln in 2019), and FFO before net interest and taxes, according to ACRA's calculations, remained at the same level and amounted to RUB 2.2 bln, which is due, among other things, to the loss of a portion of revenues generated by the HoReCa segment. The Agency expects a recovery and growth in the profitability by the end of 2021 due to a recovery in demand in the HoReCa segment, an increase in sales volumes, and a positive effect from the deduction of excise tax on grapes, including through the acquisition of the Yubileinaya Winery. According to ACRA's estimates, the weighted return on FFO before net interest and taxes exceeds 25%, which indicates a very high level of profitability as per ACRA's methodology.
Very high assessment of liquidity and low assessment of cash flow. Abrau-Durso benefits from a comfortable debt repayment schedule. As of July 1, 2021, the amount of committed credit limits available to the Company was RUB 2.7 bln, which fully covers the Company's repayment needs in the coming years. ACRA notes that the low assessment of FCF is associated with the acquisition by the Company of the Yubileinaya Winery in 2020. FCF was also under pressure from the Company's lower profitability compared to 2019, which is due to the COVID-19 restrictions. ACRA expects a positive FCF by the end of 2021, taking into account the specifics of settlements with major buyers.
KEY ASSUMPTIONS
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Capex and dividend policy in 2021−2023 in line with the Company's plans;
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Revenues and return on FFO before fixed charges and taxes in 2021 higher than in 2020.
POSSIBLE 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:
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FFO before net interest and taxes sustainably higher than RUB 5 bln amid weighted FCF margin exceeding 2%;
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Significant increase in product diversification amid FFO before net interest and taxes exceeding RUB 5 bln;
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The weighted ratio of debt to FFO before net interest declining below 2.0x.
A negative rating action may be prompted by:
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The weighted ratio of FFO before net interest to interest declining below 5.0x;
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The weighted ratio of debt to FFO before net interest declining exceeding 3.5x.
RATING COMPONENTS
SCA: a.
Adjustments: no.
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.
The credit rating has assigned to Abrau-Durso PJSC for the first time. The credit rating is expected to be revised within one year following the publication date of this press release.
The assigned credit rating is based on the data provided by Abrau-Durso PJSC, information from publicly available sources as well as ACRA’s own databases. Rating analysis has been carried out on the basis of the IFRS financial statements of Abrau-Durso PJSC. The credit rating is solicited, and Abrau-Durso PJSC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Abrau-Durso PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
