Fitch Ratings has affirmed
The Outlook is Stable.
The rating reflects the group's small scale, limited geographical diversification, improved, albeit still high, foreign-currency (FX) risk, and delayed deleveraging in comparison to our previous forecast. Negative free cash flow (FCF) generation and exposure to
Rating strengths are its leading market position, which provides sustained revenue visibility, and should support AE's moderate funds flow from operations (FFO) generation.
Key Rating Drivers
Moderate Cash Generation: AE's Fitch-defined EBITDA margin decreased to 10.4% in 2021 from 14.7% in 2020, slightly worse than our forecast, on intensified supply-chain disruption in 2H21. Rising inflation is likely to constrain a rise in EBITDA margin to 11% in 2022, mainly on export sales. Our base case foresees a gradual rise of EBITDA margin to 13% by 2025. Nevertheless, AE's forecast operating profitability compares well with that of peers in the appliances and consumer electronics segments.
Rising Leverage: AE's gross debt-to-EBITDA rose to 3.6x, exceeding our forecast of 3.1x, reflecting weaker profitability and delaying cashflow deleveraging. Fitch expects the ratio to fall to 3.2x in 2022 on revenue growth and slight improvement in profitability, and to below 2.0x after 2024. Profitability improvement will be key to its deleveraging capacity, which if not achieved, could put pressure on leverage metrics and result in a negative rating action.
FCF Under Pressure: Historically, AE's FCF generation has been negative, due to high capex and sustained dividends payments. In 2021, FCF was materially eroded with large working-capital (WC) outflows due to repayment of trade payables following the issue of a new US dollar-denominated loan. Fitch expects WC flows to normalise in the next three years but ongoing capex and dividends payments, together with constrained profitability, will weigh on FCF generation. We expect FCF to return to marginally positive territory from 2023.
Limited Business Profile: AE's rating is constrained by its small scale versus large international peers' and limited geographic diversification with
Leading Market Position: AE is the leading household appliances producer in
High FX Exposure: While AE has increased its export sales and successfully managed to improve its cost structure linked to foreign currencies, its overall FX exposure is still high. About 77% of revenue and about 45% of costs in 2021 were in local currency, while almost all its debt was linked to US dollars. AE does not use any hedging instruments and depreciation of the Uzbekistani so'm against other hard currencies could therefore materially affect AE's leverage metrics.
Related-Parties Transactions Decrease: AE's corporate governance has seen material improvement as loans to related parties and shareholders in 2021 fell to about 10% of Fitch-defined EBITDA from about 70% in 2020. Management aim to further reduce such loans in the next two years. Nevertheless, the risk of further cash leakage via related-party transactions could constrain AE's deleveraging capacity. Financial transparency remains weak versus international peers', constraining our assessment of AE's corporate governance factor.
Derivation Summary
AE is much smaller than its direct peers such as
AE's EBITDA margin of 10%-15% and FFO margin of 8%-13% during 2021-2025 are broadly in line with that of Arcelik and Whirlpool and slightly better than
AE's current total debt/EBITDA of 3.6x is higher than that of Whirlpool and
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Average revenue growth of 17% during 2022-2026
EBITDA margin of 10.8% in 2022, rising towards 13% by 2026
Capex at 3.5%-4.5% of sales over 2022-2026
Sustained dividends payments of UZS139 billion in 2022 and over UZS170 billion from 2023
No M&A to 2026
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Evidence of improved corporate governance practice, including better financial transparency
Improved geographical diversification, with materially lower reliance on the domestic market
FCF margin above 3% on a sustained basis
Total debt/EBITDA below 2x on a sustained basis and improved liquidity
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total debt/EBITDA above 3x on a sustained basis
FCF margin below 1%
FFO margin below 10%
Deterioration in liquidity position resulting in inability to refinance short-term debt
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Tight Liquidity: At end-2021 AE's Fitch-defined readily available cash was UZS14 billion, adjusted for about UZS42 billion to cover potential WC swings. In 1H22 AE successfully refinanced and extended its US dollar-denominated bank loan. It also issued local bonds of UZS30,000 million due
AE has no available committed credit facilities but has a record of good long-term relationships with local banks that helps it refinance its short-term debt regularly.
ESG CONSIDERATION
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Issuer Profile
AE is based in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
B
Affirmed
B
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