The Russian rating agency “Expert RA” upgraded the creditworthiness up to ruA+ of Arkhangelsk PPM, which is a non-financial company, with stable outlook. Earlier, the company had ruA rating with stable outlook*.
The Arkhangelsk PPM JSC is a parent company, which consolidates all operating assets of the Group, which consists of 10 companies. The key companies are Europack Group LLC, Arkhbum JSC, producing corrugated packing and corrugated board, Arkhbum Tissue Group LLC, focused on sanitary tissue products production, Arkhbum Upak LLC, focused on the paper bags production, Arkhbum LLC, which provides the forwarding services for the Group’s companies.
The upgrade of the credit rating was due to the profitability indicators growth due to the expansion of the group's product line, the increase of the output, the formation of a positive price trend for P&P products, including due to the growth of eCommerce caused by the spread of the pandemic. The positive dynamics of financial results were also reflected on the improvement of the group's debt load metrics.
The agency estimates the resistance of the PPI to external shocks as medium low due to its cyclical nature and dependence on the condition of the industries, where its products are used, namely food, agriculture, retail, eСommerce and others, as well as family consumption. The agency takes into account the rural development of eCommerce market against the background of Covid-19 spread, due to which quarantine and other restrictive measures were temporarily introduced, which led to the growth of online purchases and the expansion of the presence of various industries segments on the eCommerce market.
The group's market and competitive positions are estimated as strong by agency. The Arkhangelsk PPM JSC occupies the first place in Russia for the containerboard production, the third place for the volume of pulp cooking and the production of the tissue segment products. The group continues to diversify its products. In 2019, production of tissue group products was launched, which together with paper products amounted for 20% in the revenue for 2020. The board and corrugated paper still accounted the largest share - 34% - in the revenue and corrugated packaging - 25%. The maximum degree of vertical integration adds additional stability. Full timber supply is provided by the lease of logging area by the APPM group and the affiliated group of the Titan Group of Companies. Integration of forests leased by the companies and further redistribution of balances between them, depending on their intended use, allows the group to receive raw materials of suitable quality for its own production in full scope.
The agency notes a medium low concentration of business. A high diversification of sales and a lack of dependence on suppliers is observed. The share of the largest contractors is less than 10% in the revenue and cost value. A moderate concentration of assets has a restraining effect - the share of the largest business unit of the group - APPM JSC - accounted for 63% of the consolidated revenue.
The level of the group's debt load has a medium positive impact on the rating. For 2020 (hereinafter - the reporting period) the ratio of debt, including finance leases (hereinafter - debt), to EBITDA decreased from 2.6x to 2.2x. The Group will continue to implement its large-scale investment program to finance the 2nd production line of the Arkhbum Tissue Group's sanitary tissue products plant, the construction of a new corrugated products plant in the Ulyanovsk region and the re-equipment of the parent company using borrowed funds. At the same time, the next 3 years from 31.12.2020 (hereinafter - the reporting date), the debt to EBITDA ratio will not exceed 3.1 x. The leverage level will be maintained through production growth and future cash flows.
The additional support to debt load metrics is provided by medium low degree of capital assets wear and tear, which makes the amount of supporting capital expenditures low. The interest load is at a comfortable level for the group. As of the reporting date, the ratio of EBITDA to annual interest payments was 6.8x. The next 3 years from the reporting date, the indicator will be at least 4.6x.
The profitability indicators continue to have a positive impact on the rating. During the reporting period, EBITDA increased by 10% up to 11 billion rubles and EBITDA profitability was 26%. The improvement in financial results was due to higher product prices, production volumes increase and optimization of operating expenses. The group's focus on the domestic market prevented logistics costs from rising significantly against the backdrop of restrictive measures between countries and high demand for international transportation. The agency expects that during 3 years from the reporting date, the average EBITDA profitability at 27% will be supported by the growth of production scale, increase in the share of high-margin products and further containment of operating expenses. The agency notes that as part of the rating analysis, a conservative approach was applied with respect to the positive price trend, in particular, a further increase in prices for key products was not laid down, but a turn of the price trend is expected in 2022. The level of foreign exchange risks is estimated as medium positive due to the natural hedging of foreign currency debt by foreign exchange revenue. As of the reporting date, there are 24% of debt obligations and 21% of revenue in foreign currencies.
The agency has a moderately positive view of the group's expected liquidity due to high operating flows together with a significant amount of undrawn credit lines, which support a major investment program. The qualitative evaluation of liquidity is assessed as high due to the comfortable schedule of debt repayment and diversification of the debt portfolio by creditors, UniCredit Bank's share was 18%.
The set of corporate risks is assessed by the agency positively. The Group has a Board of Directors and Management Board with stable composition. The Board of Directors includes one independent director. The quality of strategic planning also positively affects the rating. An expected consolidated financial model differs by a high level of detail, a conservative approach and a long-term planning time frame. The group contains risk management system elements of a, all key risks related to production, including production shut down, are insured in companies with a credit rating of at least ruA + according to the Expert RA rating.
According to IFRS reporting, the assets of Arkhangelsk PPM JSC amounted to 69.4 billion rubles, capital - 36 billion rubles as of 31.12.2020. Revenue amounted to 42.3 billion rubles, net profit - 3 billion rubles at the end of 2020.
*The Methodology for Credit Ratings Assignment to Non-Financial Corporations https://raexpert.ru/ratings/methods/current (entered into force on 03.06.2021) was applied in assigning the credit rating.