The rating agency "Expert RA" has upgraded the credit rating of the non-financial company Segezha Group to ruA+ and changed the outlook to positive. Previously the company had a rating of ruA- with a stable outlook.

Segezha Group PJSC (the Group) is one of Russia's largest vertically integrated timber industry holdings with a full cycle of logging and deep processing of timber. The Group is one of the key assets of Sistema JSFC (ruAA-, positive, "Expert RA").

The rating upgrade is due to the strengthening of the Group's market and competitive positions owing to an increase in production volume, including high value-added products, against the background of maintaining costs at a low level because of the high availability of its own wood raw materials and resilience to changes in their prices on the market as well as measures taken to improve efficiency. Also a significant impact was made by the acquisition of Novoeniseysky Wood Chemical Complex JSC as well as a number of timber industry assets planned for consolidation in the Krasnoyarsk Territory and Irkutsk Region after the acquisition of 100% of Inter Forest Rus LLC ('IFR'). The acquired assets have a favourable location in relation to the current business units of the group and a well-developed infrastructure, enabling synergy in the region and optimisation of logistics costs following the completion of the merger, and also have a significant forest fund in lease. As a result of the consolidation the group will have the largest leased cutting area in Russia totalling 23.6 million m³, providing up to 100% of needs for wood raw materials, will become the second-largest company in Europe in terms of wood processing capacity and will decisively establish its leadership in lumber market in the Russian Federation.

In addition, the decision was influenced by the improvement of operational and financial results and the improvement of debt and interest burden metrics, including through effective management of the loan portfolio. The key factors driving the growth of financial and operating results were a rise in prices for the group's products due to the recovery in business activity after lifting Covid-19 restrictions amid shortages throughout the production and supply chain as well as the optimization of operating costs.

The establishment of a positive forecast is associated with the agency's expectation of the completion of acquiring IFR, which, according to the agency, could make the group the largest in the Russian market in terms of cutting area and forest availability and solidify the group's leadership in lumber production capacity. In addition, the group will become one of the three leading woodworking companies in Europe at the lowest cost among foreign competitors. As a result, the agency expects further improvement in the financial position of the group due to an increase in production scale while containing costs and debt burden. The agency also assumes that the launch and implementation of the large-scale Segezha West project through the creation of a joint venture for subsequent consolidation will be carried out without additional suretyships from the group.

The agency notes that as part of the analysis it applied a conservative forecast for future price adjustments due to the cyclical nature of the industry, using average prices for 2020 and 2021 for 2022, followed by a 5% decline in 2023 and recovery of the trend in 2024. EBITDA and revenues of acquired assets were also included in the calculation of future cash flows.

The agency continues to assess the resilience of the industry in which the group operates to external shocks as moderately low, taking into account its cyclical nature, including due to the high dependence on demand in construction and other industries. The barriers to entry into the industry are assessed as high due to the significant capital investment required to build capacity for new entrants.

The business profile of the group features high diversification of the customer base and production assets and the absence of dependence on specific suppliers. More than 70% of the group's revenue is generated abroad, in particular, in Europe, Asia, the Middle East and North Africa. The group's products are sold both through traders (mainly in the European Union) and directly to end customers. The agency notes a low concentration of production capacities; the share of the largest business unit of the group, Segezha PPM JSC, accounted for 26% of the group's revenue.

Debt burden has a moderately positive impact on the rating level. For the period from 30 June 2020 to 30 June 2021 (the reporting period), the amount of net debt, including financial lease (except for forest areas), decreased to RUB 28.9 billion, while total debt remained at RUB 50 billion. As of 30 June 2021 (the reporting date), the debt-to-EBITDA ('OIBDA', due to comparability of the indicators) LTM ratio decreased from 4.5x to 2.3x due to an increase in financial results against the backdrop of the rouble's depreciation and optimisation of operating expenses. The agency took into account the upcoming offering of bonds for RUB 25 billion to finance the acquisition of IFR. Therefore, the agency expects the net debt-to-OIBDA ratio to average no more than 1.9x over the next 4 years from the reporting date.

The agency also notes the group’s commitment to ​​reducing the borrowing rate. During the reporting period the ratio of OIBDA LTM to annual interest payments increased from 4.2x to 9.3x. Taking into account the upcoming bond offering, the agency expects the indicator to average 12.3x over the next 4 years from the reporting date, which has a moderately positive effect on the rating.

The agency notes that the group adheres to a natural hedging policy, enabling the efficient control of currency risks. The share of foreign currency liabilities in the debt portfolio of the group is 70%, which corresponds to the share of foreign currency earnings; this has a moderately positive impact on the group's rating.

The rating is positively influenced by profitability indicators; during the reporting period the OIBDA margin increased from 20% to 31%. Taking into account a possible price correction, the agency expects that the indicator will average 31% for 4 years from the reporting date.

The Group continues to implement its planned investment programme to modernise equipment and expand production and organic growth. In 2022 priority projects include the reconstruction and modernisation of Segezhsky PPM JSC and Onega Sawmills and Woodworking Plant JSC, installation of a new paper machine at Sokol Pulp and Paper Mill JSC and construction of a laminated beam plant in Karelia with financial partners.

The Group is characterised by a moderately high level of projected liquidity – that is, investment costs, interest payments, forthcoming repayments and the acquisition of IFR are covered by the operating flow, available cash, including from the upcoming bond offering, and available credit facilities.   The quality of the group's liquidity is assessed as high due to a comfortable debt portfolio repayment schedule and diversification of funding sources.

Corporate risks have a positive impact on the rating level. The group has the Board of Directors with specialised committees: the Audit Committee, the Strategy and Sustainable Development Committee and the Nomination and Remuneration Committee. The agency notes that there are independent directors on the Board of Directors, which ensures its effectiveness. A collegial executive body represented by the Management Board has also been approved. The risk management system is assessed positively. The group has the Risk Committee, and operational monitoring is carried out on a regular basis. The group also demonstrates high quality of strategic planning; the forecast financial model is highly detailed and has a long forecasting period. The agency also notes that the corporate governance system as a whole has significantly improved as part of preparing for the IPO and meeting the requirements for the exchange listing.

As of 30 June 2021 the group's IFRS assets amounted to RUB 125 billion, while the equity amounted to RUB 45.6 billion. The revenue for the reporting period (1 July 2020–30 June 2021) amounted to RUB 80 billion, and the net income, to RUB 8.3 billion.

Contacts for media: pr@raexpert.ru, tel.: +7 (495) 225-34-44.

The credit rating of Segezha Group PJSC was first published on 29 October 2019. The previous rating press release for this rated entity was published on 27 October 2020.

The credit rating was assigned under the national scale for the Russian Federation and is long term. The credit rating is expected to be revised within one year from its assignment or the last revision.

In assigning the credit rating, the method for assigning credit ratings to non-financial companies https://raexpert.ru/ratings/methods/current (effective 3 June 2021) was applied.

The assigned rating and the outlook reflect all material information in relation to the rated entity available to JSC Expert RA which is deemed by the agency to be of appropriate reliability and quality. The key sources of information used in the rating analysis were the data from the Bank of Russia and Segezha Group PJSC as well as the data from JSC Expert RA. The information used by JSC Expert RA for the purpose of the rating analysis was sufficient for the methodology in all material respects.

The credit rating was assigned on the basis of the concluded agreement; Segezha Group PJSC was involved in the assignment of the rating.

The number of members of the Rating Committee was sufficient to comply with quorum requirements. The leading rating analyst presented the factors influencing the rating to the members of the Rating Committee, and the members of the committee expressed their opinions and comments. The Chairman of the Rating Committee provided an opportunity for each member of the Rating Committee to share their opinion before the start of the voting procedure.

Over the past 12 months JSC Expert RA has provided Segezha Group PJSC with no additional services.