ACRA AFFIRMED THE CREDIT RATING OF PJSC European electrical engineering AT BBB(RU), STABLE OUTLOOK

ACRA AFFIRMED THE CREDIT RATING OF PJSC European electrical engineering AT BBB(RU), STABLE OUTLOOK

The credit rating of PJSC European electrical engineering (heinafter referred to as PJSC European electrical engineering, the Company, the Group) is based on good liquidity, as well as a high level of debt coverage against the backdrop of a low debt burden. At the same time, ACRA notes the small size of Evropeyskaya Elektrotekhnika’s business relative to the largest Russian companies, its average cash flow, and assesses the Group’s market position at a low level due to significant fragmentation of the engineering market in Russia.

PJSC European electrical engineering  is one of the leading Russian companies in the development of energy and power supply systems, lighting and low-voltage systems. Since its inception in 2004, PJSC European electrical engineering has evolved from a trading company into a full-fledged engineering company with its own production facilities (41% of the products and equipment sold by the Group are manufactured using its own production facilities). In 2018, the Company acquired facilities for the production of oil and gas equipment in the Republic of Bashkortostan, and in 2020 completed the process of registration of its ownership. The further development plans of the Group are related to the launch of a new highly profitable line of business — the sale and leasing of innovative oil and gas equipment. The main shareholders are S. N. Dubenok and I. A. Kalenkov. About 7% of the Company's shares are in a free float.

KEY FACTORS FOR ASSESSMENT
Average assessment of the operational risk profile. The market share of PJSC European electrical engineering  does not exceed 0.5%, however, in certain segments the Company occupies a leading position (up to 37% of the market for hot-dip galvanized reinforced cable support systems and cable holders for ultra-deep mines, up to 8% of the market for flare installations). The Group is secured with orders over a five-year horizon (including taking into account promising contracts with a high probability of conclusion), while there is a possibility of postponing the dates of conclusion of some contracts by several months, which may lead to a shift in the receipt of the corresponding share of revenue for the same time period. At the same time, the potential impact of the postponement of contracts, according to ACRA, may affect no more than 10% of revenue due to the good diversification of the contract base by buyers. The sales markets in which the Company operates are characterized by moderate cyclicality, while in 2019 the engineering systems business accounted for 77% of the Group's revenue, and the rest was accounted for by oil and gas equipment; in 2020–2021, the shares of these destinations amounted to 74% and 26%, respectively. The Company plans for the next few years to increase the share of oil and gas equipment to 35%. Dependence on subcontracting and components in general is at an average level: dependence on subcontracting is minimal (about 2.5%), and the share of resale of components and equipment provides 60–80% of revenue. In 2021, in the Technopolis Moscow SEZ, the Company's new site for the production of "smart" electrical distribution boards and automation boards was launched at full capacity. The geographic diversification of product sales markets is at an average level: up to 9% of products are exported (mainly oil and gas equipment). In 2021, the Company opened a representative office in Cairo.

Adequate level of corporate governance. The Group's strategy is fairly formalized; it is approved by the board of directors, but is periodically subject to significant adjustments in accordance with changes in external factors and the market situation. The strategy reflects the main target financial and operational indicators to be achieved. As part of the strategy, a significant increase in the more profitable direction (production of equipment for the oil and gas and petrochemical industries) in the Group's total revenue is envisaged. In 2020, the Company successfully passed the certification of services in the INTERGAZCERT system, which enables it to supply equipment to Gazprom Group companies. ACRA notes the Company's consistent implementation of its strategy, including annual growth in revenue and FFO before net interest and taxes. PJSC European electrical engineering risk management system is at an average level: currently, exposure to currency and interest rate risks is minimal, and purchases of foreign components are offset by proceeds from export contracts (natural hedging). ACRA assesses the quality of PJSC European electrical engineering corporate governance as adequate, including in connection with the involvement of the Company's owners in its activities. The Group has seven legal entities due to the nature of the business. There are transactions with related parties that are under the control of the Board of Directors of the Company. ACRA assesses the financial transparency of PJSC European electrical engineering as high: reports are published quarterly; Meetings with investors are held on a regular basis, during which information about the current activities and development plans of the Group is disclosed.
Small business size. FFO before net interest and taxes for 2021 is estimated by ACRA at RUB 611 million. (536 million rubles for 2020). According to the Agency’s forecasts, according to the results of 2022, this indicator will amount to 879 million rubles. and continue to grow organically. The FFO margin before net interest and taxes for 2021 was 13.4% and will remain at about this level over the next few years. The indicator at the indicated level will be supported by the growth of the Company's profitability due to an increase in the share of oil and gas equipment in the sales structure. In 2021, the Company installed a unique mobile block-modular pre-discharge unit at the Nazymskoye field of PJSC LUKOIL.

Low debt burden with a high level of debt service. As of December 31, 2022, PJSC European electrical engineering had no debt. There are no guarantees issued outside the Group's consolidation perimeter. At the end of 2021, the Company's total debt was RUB 80 million, or 0.15x of FFO before net interest payments, down from 2020 levels. At the same time, debt servicing is high due to the low total debt. ACRA expects that the Company will have no debt in 2023–2024.

The Company's liquidity is assessed as good. As of December 31, 2022, the Company had free credit limits totaling RUB 1 billion, and RUB 380 million in its accounts.

KEY ASSUMPTIONS
annual revenue growth rates by segments in 2023-2024 in accordance with the announced volumes and terms;

payment of dividends and investments in 2023-2025 in accordance with the declared volumes and terms.

FACTORS FOR A POSSIBLE OUTLOOK OR RATING CHANGE
The “stable” outlook assumes with a high degree of probability that the rating will remain unchanged over a 12–18 month horizon.

Positive rating action could result from:

an increase in the weighted annual FFO before net interest payments and taxes above RUB 5 billion. while maintaining the volume and terms of the contract base at a level not lower than the current one;

an increase in the weighted annual FFO margin before net interest payments and taxes above 25% while maintaining the volume and terms of the contract base at a level not lower than the current one;

an increase in the weighted FСF profitability indicator above 5% while maintaining the volume and terms of the contract base at a level not lower than the current one.

Negative rating action could result from:

decrease in FFO before net interest payments and taxes below RUB 0.5 billion. while reducing FFO margin to net interest payments and taxes below 8%;

an increase in the debt burden (the ratio of total debt to FFO before net interest payments) above 1.0x while reducing the level of debt service (FFO before net interest payments to interest payments) below 10.0x;

decrease in profitability on FCF to negative values with a simultaneous increase in the share of capital expenditures in revenue above 10%;

significant deterioration in access to external sources of liquidity;

a significant reduction in the volume and terms of the contract base;

a significant increase in dividend payments against the backdrop of increased investment.

RANKING COMPONENTS
Self-Credit Rating (SCA): bbb.

Corrections: none.

RATES OF ISSUES
There are no outstanding issues.

REGULATORY DISCLOSURE
The credit rating of PJSC European electrical engineering was assigned on the national scale for the Russian Federation based on the Methodology for assigning credit ratings to non-financial companies on the national scale for the Russian Federation, as well as the Key Concepts used by the Analytical Credit Rating Agency in its rating activities.

For the first time, the credit rating of PJSC European electrical engineering  was published by ACRA on 10/11/2018. The next revision of the credit rating and outlook on the credit rating of PJSC European electrical engineering is expected within one year from the date of publication of this press release.

The credit rating was assigned on the basis of data provided by PJSC European electrical engineering, information from open sources, as well as ACRA databases. The credit rating is requested, PJSC European electrical engineering took part in the process of assigning a credit rating.

When assigning a credit rating, information was used, the quality and reliability of which, in ACRA's opinion, are appropriate and sufficient for the application of the methodologies.

ACRA provided no additional services to PJSC European electrical engineering. No conflicts of interest were identified as part of the credit rating assignment process.