The credit rating of LLC «ASK-Stroitelstvo» (hereinafter – the Company, Atomstroykompleks, or ASK) is based on very strong business profile of the Company, high business profitability, high assessment of cash flow, very low leverage, very high assessment of debt servicing and strong liquidity. At the same time, very high industry risk, low assessment of corporate governance and weak geographic diversification put pressure on the Company’s credit rating level.
LLC «ASK-Stroitelstvo» is the largest residential real estate developer in Ekaterinburg and Sverdlovsk Region. The Company’s portfolio of in-progress projects totaled 1.7 mln sq. m. The expected cumulative floor space of projects planned for commissioning in 2018-2020
is 686,000 sq. m.
Key rating assessment factors
Industry risk is assessed as very high due to pronounced cyclical nature of the sector, high level of overdue debt, and substantial number of defaulted companies in the last five years. Company’s industry is a very strong factor limiting its rating.
Very strong business profile is based on highly diversified project portfolio, stable structure of schedules and terms and conditions for project implementation as well as high coverage by internally manufactured materials and large portion of construction works performed with no engagement of contractors. Strong brand and high consumer properties of commissioned real estate support the Company’s ability to meet sales targets. In 2013, Atomstroykompleks Group split into construction and industrial divisions – Atomstroykompleks-Stroitelstvo and Atomstroykompleks-Promyshlennost, respectively. Although manufacture of construction materials is the main focus of Atomstroykompleks-Promyshlennost, ACRA takes into account the fact that the Group has own production facilities when assessing ASK’s dependence on suppliers of materials. Nine plants of Atomstroykompleks-Promyshlennost fully cover ASK needs in construction materials. The Company performs a substantial share of construction works independently.
Low assessment of the Company’s corporate governance is determined by low assessment of management structure and very low assessment of the group structure. Company’s management structure is insufficiently formalized; there is no board of directors in the Company. In view of involvement of shareholders into operational management, a risk of decision-maker’s irreplaceability may arise. Very low assessment of the group’s structure stems from existence of closed real estate unit investment funds. Although financial results of these funds are consolidated in the group’s financial reporting, Atomstroykompleks owns no units in the above funds. Net Assets Value (NAV) of these funds account for around 20% of ASK’s equity capital; they generate 23% of revenues and 44% of EBITDA of the Company. At the same time, ACRA’s assessment of ASK’s strategy consistently implemented by the Company is high. ACRA assesses strategy implementation as successful. The operational target is to retain the share in the residential real estate market of Ekaterinburg and Sverdlovsk Region at 15% or higher. Going forward, an increase of the share to 18% is planned subject to keeping the Company’s coverage of Ekaterinburg’s districts in terms of residential real estate construction. When assessing the management strategy, ACRA also considered the strategy and development outlook of Atomstroykompleks-Promyshlennost. Previously, the industrial division of Atomstroykompleks Group implemented a strategy to erect modern production facilities, which proved to be very successful and had a positive effect on competitiveness of the group as a whole.
High profitability. High profitability is largely determined by the Company’s ability to hit its sales targets, relatively low construction costs, and comparatively high construction speed, which results from performance of construction works by the Company independently and production of high-quality construction materials by plants of Atomstroykompleks-Promyshlennost. High profitability is also supported by relatively high share of high-margin projects in the business and premium market segments (29%) in the total portfolio of ASK. In 2016, the Company’s net FFO margin before interest and taxes equaled 13%. According to ACRA projections, this indicator would average 13.6% in 2014-2019.
Very low leverage and very high debt servicing indicators are the result of the Company’s conservative financial policy. ASK favors entering into contracts with landholders, which involves payment for land by shares in the project. This allows avoiding any conflicts of interest between the landowner and the developer as well as reduces investment burden on the project at the stage of purchasing the plot and initial construction. In 2016, net debt to FFO before net interest payments ratio stood at 0.7x. ACRA expects the net debt of ASK to reach negative values in the forecast period. Company’s leverage is assessed as very low. Debt servicing indicators are very high. For instance, FFO before net interest payments to interest payments ratio equaled 9.4x as at end-2016. ACRA expects this ratio to surge to 69.6x by year-end 2020.
Strong liquidity of ASK is primarily achieved through low debt and availability of substantial amounts of free cash on Company’s accounts as compared to the amount of debt (RUB 695 mln as at December 19, 2017). According to ACRA estimates, the weighted current liquidity ratio of ASK equals 3.6x.
Key assumptions
- Observing the planned construction schedule and meeting sales targets;
- ACRA calculations include real estate under construction and real estate planned to be commissioned according to the Company’s current construction program;
- Another Agency’s assumption is that total floor space to be commissioned in 2021-2022 will be at least as high as expected in 2020;
- Zero price growth in the primary real estate market of Ekaterinburg and Sverdlovsk Region in 2018-2020;
- Prices for construction works and materials outpacing real estate prices, and increase in wages equaling the inflation rate.
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:
- Improved organizational structure of the Group.
A negative rating action may be prompted by:
- Net debt to FFO before net interest payments ratio increasing above 1x, with FFO before net interest payments to net interest payments ratio concurrently declining below 8x;
- FFO net margin before interest payments and taxes declining below 8% or FCF margin turning negative;
- Residential real estate prices in the primary market of Ekaterinburg and Sverdlovsk Region declining by more than 15%, while prices for construction works and materials increase as projected;
- Regulatory changes capable of having a material adverse effect on Company’s indicators.
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 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.
A credit rating has been assigned to LLC «ASK-Stroitelstvo» for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 19, 2017).
The assigned credit rating is based on the data provided by LLC «ASK-Stroitelstvo», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and LLC «ASK-Stroitelstvo» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by LLC «ASK-Stroitelstvo» in its financial statements have been discovered.
ACRA provided no additional services to LLC «ASK-Stroitelstvo». No conflicts of interest were discovered in the course of credit rating assignment.
