Fitch Assigns First-Time 'B+' IDR on JSC HMS Group
09 Dec 2016 5:13 AM
Fitch Ratings-London-09 December 2016: Fitch Ratings has assigned Russian pump manufacturer JSC HMS Group first-time Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'B+', and Foreign- and Local-Currency Short-Term IDRs of 'B'. The Outlook is Stable.
HMS' ratings reflect its relatively weak business profile, with high geographic concentration and high exposure to investment levels in the Russian oil and gas (O&G) sectors. The ratings are further limited by Fitch's expectation of negative free cash flow for the foreseeable future, due to higher capital expenditure and continued dividend outflow.
KEY RATING DRIVERS
Strong Undiversified Market Position
HMS is a market leader in Russia (BBB-/Stable) in two of its three main business segments - pumps (42% market share), and O&G equipment (30% market share). The company supplies equipment to all major Russian O&G companies including Rosneft, Gazprom ('BBB-'/Stable), Gazprom Neft ('BBB-'/Stable), Transneft and Lukoil (BBB-/Stable). HMS also has over 5,000 small and medium-sized clients that together generate about 75% of its revenues from standard pumps and compressors, which is the company's sustainable recurring business. The remaining 25% is generated by large tailor-made integrated products.
Oil Production Resilience Expected
Fitch's base case assumes that Russia's high production will be maintained despite price fluctuations and that Russia will remain a key global exporter of crude and oil products. The continued high production volumes, underpin Fitch's expectations for continued pump and compressor sales to replace existing, fully depreciated units. Russia's oil production is at a record high despite western sectoral and financial sanctions. It averaged 11.2 million barrels of oil equivalent per day in October 2016, a post-Soviet record, mainly supported by ramping up greenfield output.
Share of Aftermarket Services Low
HMS' aftermarket maintenance services, which typically provide a stable income source in a cyclical downturn, contribute a very low proportion of revenues. This is because customers usually have their own maintenance service divisions and aftermarket revenues mainly come from selling spare parts.
Compressor Business More Volatile
Fitch does not expect the higher volatility of compressor sales to have a major effect on the rating, due to the modest contribution of this segment to the company's revenues. The company expects the share of large products in the compressor segment to increase and drive growth. Fitch expects the volatility of this business to be high due to high exposure to large contracts.
No FX Exposure
HMS is not exposed to exchange rate risk, as virtually all its debt, revenues and costs are denominated in Russian roubles. However, the company's operations are geographically concentrated, with the overwhelming majority of its products sold in Russia.
HMS' 'B+' IDR reflects its concentrated geographic and industry exposure and our expectation that the group will remain free cash flow negative for the foreseeable future. This is offset, in Fitch's view, by its leading market position in a niche sector with relatively high barriers to entry, a strong customer base largely consisting of major Russian O&G companies, its recurring business and healthy profitability and leverage metrics. We view the company's liquidity position as adequate.
Fitch's key assumptions within our rating case for the issuer include:
- Moderate revenue growth not exceeding 5% for all segments over 2017-2020
- EBITDA margin below historical levels, capped at 14%
- Capex in line with the company's guidance (about 5% of revenues)
- Dividend pay-out ratio at 60% of prior-year net income
Future developments that may, individually or collectively, lead to positive rating action:
- Sustained positive free cash flow generation
- FFO adjusted net leverage sustained below 2.5x
- FFO fixed-charge coverage sustained above 3.5x
Future developments that may, individually or collectively, lead to negative rating action:
- Continuous failure to secure large integrated projects from major Russian O&G companies
- FFO-adjusted net leverage sustained above 3.5x
- FFO fixed-charge coverage sustained below 2.0x
We consider HMS' liquidity position adequate. At 1 October 2016, the group had reported cash and short-term deposits of RUB3bn on its balance sheet against short-term debt of RUB3.2bn. Almost all the cash is held in Russian roubles, with only 4% in Ukrainian hryvnia and Belarusian roubles for use by local subsidiaries. This is matched with the debt currency, as over 99% of the debt is held in Russian roubles. HMS had RUB10bn in available undrawn credit lines from major Russian banks.
At 1 October 2016, the peak in maturities fell on 2017-2018, with RUB10.3bn to be repaid during this time. The potential local bond placement of RUB3bn in 2017 (with expected maturity in 2020) and the ongoing negotiation of loan prolongation will help spread the maturities more evenly. We conservatively forecast that free cash flow will be negative over the forecast period due to high capex and dividends. However, we do not think the company will have any issues refinancing over the medium term.
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Dr. Georgy Kharlamov
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Fitch Deutschland GmbH
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Date of Relevant Rating Committee: 23 November 2016
Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: firstname.lastname@example.org; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: email@example.com.
Summary of Financial Statement Adjustments
Operating leases: operating lease expenses were capitalised using a multiple of 6x times as the company is based in Russia.
Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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