The credit rating of Kuzina LLC (Kuzina, the Company) is based on the very low assessments of industry risk profile and geographic diversification. In the Agency’s opinion, the Company is also characterized by low assessments of market position, corporate governance, and business profile.
The financial risk profile assessment is medium since the Company has a moderately high leverage, low coverage of interest and rent payments, medium profitability and FCF, very low score for business size, and moderately high liquidity.
Kuzina is a coffeehouse chain that includes 40 coffee shops located mostly in Novosibirsk.
KEY ASSESSMENT FACTORS
Very low assessment of the industry risk profile; weak market position. In ACRA’s view, the demand in the catering market is pro-cyclical. The market entry barriers are low. A similar situation, in the Agency’s opinion, is characteristic of the coffeehouse segment. All these considerations result in a very low assessment of the industry risk profile. Kuzina is a successful player in the Novosibirsk catering market regarded by ACRA as fragmented, therefore the market position is assessed as low.
Weak business profile and very weak geographical diversification. Kuzina is developing its chain of 40 coffee shops spread mainly across Novosibirsk. A coffeehouse chain with a similar brand is also present in Moscow, but it is controlled by another company partially owned by one of Kuzina’s shareholders, therefore, this part of the chain was excluded from the rating analysis. The overall chain branded Kuzina includes 65 coffee shops. As a result, ACRA notes a very weak geographical diversification of the chain. The Company’s concentration on a single brand negatively affects the business profile assessment, but is partially offset by its moderate recognition. The chain’s coffee shops operate in a single format and, in ACRA’s opinion, belong to the mass segment, which is neutral for the rating.
Low assessment of corporate governance. Despite the low level of formalization, Kuzina’s development strategy is fairly consistent, which makes it possible to assess it at a medium level. Corporate procedures and risk management function, in ACRA’s opinion, are poorly developed in the Company. The financial transparency of Kuzina is assessed by the Agency as low since the Company does not prepare IFRS reports, while RAS reports are disclosed (the auditor is AKG FINANCE LLC). ACRA assesses the risks of the group structure as increased because, in addition to the above-mentioned affiliation of the Moscow part of the chain to another person, all confectionery products are purchased by the Company from a related party. Moreover, the Agency notes that in 2023, the Federal Tax Service and other claimants filed bankruptcy petitions against several companies owned by the shareholders of Kuzina. According to the Company, some of these claims have been withdrawn and amicable agreements are being made on other claims.
Very low assessment of the size of business and medium profitability. According to ACRA’s forecast, Kuzina’s revenue may amount to RUB 425–430 mln by the end of 2023, which is 7% lower than in 2022. In 2024–2026, the Agency expects the revenue to recover with an average annual growth rate of 3–5%. Thanks to the work done by the Company to optimize its operating expenses, the Company’s FFO1 before net interest and taxes may not decline against the background of a fall in revenue and may amount to RUB 60–65 mln by the end of this year, according to ACRA’s estimates (+5–10% compared to the past year). Such amount of FFO before net interest and taxes corresponds to the very low score for the size of business as per the Agency’s methodology. The dynamics of FFO before net interest and taxes described above has a positive effect on the operating margin, which may increase from 12% by the end of 2022 to 13% in 2023, which corresponds to the medium level.
1 FFO means cash flow from operations before changes in working capital.
Moderately high leverage and low coverage of interest and rental payments. As of June 30, 2023, Kuzina’s debt portfolio included a RUB 50 mln loan from JSC “Bank Finservice” and two bond issues with the outstanding amount of RUB 73 mln. Since the share of rental payments in the Company’s costs is significant, in the analysis of the leverage, the Agency proceeded from the calculations of performance indicators both with and without capitalized lease debt. By the end of 2023, ACRA expects the ratio of total debt including rent to FFO before fixed charges at 4.6x, and the ratio of total debt to FFO before net interest at 2.2x, which result in the moderately high leverage according to ACRA’s methodology. The Agency does not expect a significant change in the Company’s leverage in 2024–2026.
ACRA forecasts that by the end of 2023, the ratio of FFO before fixed charges to fixed charges will be 1.5x and FFO before net interest to interest will be 2.9x, which indicates a rather low coverage. A certain pressure on the coverage indicators in 2024–2026 may be exerted by the fact that bank loans are borrowed at a floating rate.
Moderately high liquidity and medium FCF. Against the background of the almost complete absence of dividends and capital expenses, the Company’s FCF was positive in 2021–2022, and the FCF margin was 12% at the end of 2022. In its forecast for 2023, ACRA assumes the outflow of funds to replenish working capital, which may push FCF down to a level close to zero. In 2024–2026, the Agency expects the FCF margin to be no higher than 3%. A positive FCF, coupled with a comfortable debt repayment schedule, determines the moderately high assessment of the Company’s liquidity.
KEY ASSUMPTIONS
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Annual revenue growth by 3–5% in 2024–2026.
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The FFO before fixed charges and taxes margin at 8–12%.
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Absence of annual dividend payments until late 2026.
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Access to external sources of liquidity.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the credit rating will highly likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average ratio of rent-adjusted total debt to FFO before fixed charges declining below 4.0x and weighted average ratio of total debt to FFO before net interest declining below 2.0x;
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Weighted average ratio of FFO before fixed charges to fixed charges exceeding 1.5x or weighted average ratio of FFO before net interest to interest exceeding 5.0x;
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FFO before net interest and taxes margin sustainably exceeding 15%;
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Weighted average FCF margin exceeding 5%;
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Significantly wider geography of operations;
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Much better corporate governance practices.
A negative rating action may be prompted by:
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Weighted average ratio of rent-adjusted total debt to FFO before fixed charges exceeding 6.0x or weighted average ratio of total debt to FFO before net interest exceeding 3.5x;
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Weighted average ratio of FFO before fixed charges to fixed charges declining below 1.0x or weighted average ratio of FFO before net interest to interest declining below 2.5x;
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Rent-adjusted total debt to FFO before fixed charges exceeding 1.0x;
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FFO before fixed charges and taxes margin declining below 8%;
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Weighted average FFO or weighted average FCF becoming negative;
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Worse access to external sources of liquidity.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): b+.
Support: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to Kuzina LLC 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.
A credit rating has been assigned to Kuzina LLC 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 data provided by Kuzina LLC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and Kuzina LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Kuzina LLC. No conflicts of interest were discovered in the course of credit rating assignment.
