The credit rating of JSC “GK “EKS” (hereinafter, EKS Group, or the Company) has been upgraded due to an increase in the assessment of the corresponding sub-factor of the business profile as a result of the growth of the contract base, improvement of the Company’s leverage assessment, and the Agency’s expectations regarding further growth of FFO before net interest payments and taxes.
In ACRA’s opinion, EKS Group continues to be characterized by a strong operational risk profile, strong assessments of liquidity and cash flow, low leverage, as well as medium assessments of coverage and business size. The Company’s rating continues to be limited by high industry risks and low profitability. The Agency classifies infrastructure construction as a high-risk industry, which puts considerable pressure on the rating of EKS Group. At the same time, in ACRA’s opinion, the Company operates in the least risky segment of the industry and the low risks of non-payment under government contracts contribute to a partial reduction in the industry risk.
EKS Group acts as a general contractor in the implementation of construction and restoration projects. As of the end of 2022, EKS Group ranked seventh among the largest companies in the segment of construction of social, utility and road infrastructure in Russia.
KEY ASSESSMENT FACTORS
The strong operational risk profile assessment is based on a medium assessment of market position, the strong business profile, as well as an adequate level of corporate governance. The Company operates in most of Russia’s regions. EKS Group carries out projects to design and construct educational and sports clusters, medical centers, and sewerage treatment facilities, to upgrade transport infrastructure, reconstruct and re-equip gas sector facilities, reclaim solid waste landfills, create and develop facilities for the improvement of urban areas, as well as restore cultural heritage monuments. The Company holds a number of licenses that allow it to participate in the implementation of various projects, including a license from the Federal Security Service of Russia to carry out work related to using state secrets; a license from the Russian Ministry of Culture for carrying out activities to preserve cultural heritage objects (historical and cultural monuments) of the peoples of the Russian Federation; and a license from the Russian Ministry for Civil Defense, Emergencies and Elimination of Consequences of Natural Disasters to install, maintain and repair fire safety equipment for buildings and structures.
EKS Group’s fleet includes more than 3,000 units of construction and special equipment. The average share of subcontracted work is about 40%. The base of signed contracts ensures that the Company has work until 2026. EKS Group’s contract base has grown considerably since the last rating action due to a broadening of the geography of operations, and currently amounts to three years’ worth of the Company’s revenues. In view of this, the Agency improved the assessment of the sub-factor Contract Base Quality, which is one of the reasons for upgrading the Company’s credit rating. The contract portfolio of EKS Group is stable (it largely consists of government contracts or contracts with state-owned companies), yet at the same time it is well diversified. ACRA views the high level of advance payments for contract execution as a positive factor that contributes to reducing the Company’s need to borrow.
Medium size of the Company and low profitability. EKS Group’s revenues grew by 21.8% in 2022, and FFO before net interest payments and taxes stood at RUB 4.2 bln. The Agency expects this indicator to range from RUB 4.5 bln to 6.3 bln from 2023 to 2026. The weighted average FFO margin before net interest payments and taxes will be 4.9% in 2021–2026, which corresponds to a low assessment as per ACRA’s methodology.
Low leverage and medium coverage. The ratio of total debt to FFO before net interest payments declined to 1.0x in 2022 (vs. 2.2x in 2021) on the back of growth of the Company’s financial results. ACRA assumes that in the absence of major investment expenses and dividend payments, the Company’s leverage will remain close to the current level. The weighted average ratio of total debt to FFO before net interest payments for the period from 2021 to 2026 is estimated by the Agency at 1.5x and therefore the assessment of this sub-factor was improved. ACRA estimates that the weighted average ratio of total debt to capital for the specified period will be about 0.5x. As the receipt of payments under government contracts is influenced by the seasonal factor, EKS Group experiences some cyclicality in terms of changes to leverage — usually in the second quarter debt increases, and by the end of the year it decreases. The weighted average ratio of FFO before net interest payments to interest payments for the period from 2021 to 2026 is estimated by ACRA at 4.4x, which corresponds to medium debt coverage.
Strong liquidity and cash flow. The weighted average FCF margin from 2021 to 2026 is estimated by the Agency at 3.4%. ACRA does not expect EKS Group to pay dividends in 2023–2026. The strong assessment of liquidity is determined by an expected positive cash flow in 2024–2026, as well as a sufficient amount of undrawn credit lines and free cash in the Company’s accounts. The assessment of the liquidity factor is constrained by the primarily short-term nature of the debt portfolio.
KEY ASSUMPTIONS
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Completing projects as planned;
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Revenues increasing by 17% in 2023 and 10–13% in 2024–2026;
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FFO margin before net interest payments and taxes at 5% in 2024–2026;
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No dividend payments in 2024–2026;
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Continued access to external liquidity sources.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Weighted average ratio of FFO before net interest payments to interest payments exceeding 5.0x, weighted average FFO margin before net interest payments and taxes exceeding 8%, and weighted average FFO before net interest payments and taxes exceeding RUB 5 bln.
A negative rating action may be prompted by:
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Weighted average ratio of FFO before net interest payments to interest payments declining below 2.5х;
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Ratio of total debt to FFO before net interest payments exceeding 2.0x;
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Considerable decline in the monetary size of the contract base;
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Weighted average FCF margin declining below 2%.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb+.
Adjustments: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to JSC “GK “EKS” 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 JSC “GK “EKS” was published by ACRA for the first time on December 17, 2021. 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 JSC “GK “EKS”, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and JSC “GK “EKS” 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 JSC “GK “EKS”. No conflicts of interest were discovered in the course of credit rating assignment.
