London, 25 January 2021 -- Moody's Investors Service ("Moody's") has today
assigned a corporate family rating (CFR) of Ba2 and a probability of default
rating (PDR) of Ba2-PD to PJSC Group of Companies PIK (PIK),
the largest homebuilder in Russia. Concurrently, Moody's
has assigned a long-term issuer rating of Ba3 to LLC PIK-Corporation
(PIK Corporation), a subsidiary of PIK. The outlook for both
entities is stable.
The assignment of the Ba2 CFR reflects PIK's leading market position
in the Russian homebuilding market, integrated business model,
robust operating and financial performance, and sound credit metrics
which are likely to be sustained in 2021-22. The rating
also factors in a positive momentum in the market as well as moderately
supportive long-term fundamentals. At the same time,
the rating takes into account the company's exposure to the volatile residential
real estate market in Russia and high concentration in the Moscow city
and the Moscow region (the Moscow metropolitan area).
PIK is the largest homebuilder in Russia, with revenue of RUB316
billion ($4.7 billion) in the last 12 months ended 30 June
2020, up 25% from the same period a year earlier, and
6.5 million square meters (sqm) under construction. The
company accounts for around 25% market share in the Moscow metropolitan
area. The large scale, leading market position and strong
brand support PIK's operating efficiency and competitive strength.
The company's large land bank of around 11 million sqm of sellable
area, which is sufficient for three to four years, and prudent
and consistent approach to land replenishment provide for further growth.
The company benefits from its integrated business model which covers the
full cycle of residential real estate development from land acquisition
and project design to construction, marketing, sales and facility
management. The company has construction resources and production
facilities of concrete and reinforced concrete structures and building
equipment which together with its focus on digitalisation of business
processes result in efficient operations and cost savings. The
vertical integration and lean operations make the company a competitive
bidder for commercial construction orders for third parties which result
in some diversification and additional profit. PIK also develops
other complementary offerings, such as facility management,
brokerage, repair services and digital services, which have
a small share in its total financial results but help to attract additional
customers for the core business and strengthen brand recognition.
PIK has high exposure to the Moscow metropolitan area where it generates
more than 90% of revenue. The concentration risk is partially
mitigated by the market's lucrativeness and large size as well as
the company's gradual expansion to other regions.
The inherent volatility of the Russian residential real estate market
and its susceptibility to economic cycles are balanced by the positive
momentum and moderately favourable long-term fundamentals.
Contracted interest rates, the state support to subsidise mortgage
interest rates and the economic turbulence spurred demand for apartments
in 2020, leading to an accelerated price growth of around 10%-15%
on the primary market. This upbeat environment may continue through
mid-2021 and stabilise by year-end 2021. The relatively
low housing stock per capita, considerable share of obsolete houses
and the state's focus on improving housing affordability support
the Russian residential market in the long-term, although
consumers' reduced real disposable income and increased indebtedness
may curb growth in demand after 2021. At the same time, the
Moscow metropolitan area is characterised by relatively resilient demand
for apartments because of (1) its investment attractiveness for individual
and (2) the continuing influx of internal labour migrants, including
PIK built up its revenue by 20%-25% in 2020 (according
to Moody's estimates) and 14% in 2019, and is likely
to demonstrate double-digit growth in percentage terms in 2021-22
thanks to (1) an increase in its residential mass market offering,
(2) an increase in commercial construction and fee-development
for third parties, and (3) development of other services,
including the facility management. The economy of scale,
continuing focus on operating efficiency and vertical integration should
help the company to maintain its solid adjusted EBITDA margin of 19%-20%.
PIK should also generate positive free cash flow before dividends over
the next two years despite the large increase in working capital because
of the implementation of escrow accounts.
Moody's expects PIK to maintain its healthy credit metrics, with
Moody's-adjusted gross debt/EBITDA being within 3.0x-3.5x
in 2020-21 and adjusted EBIT/interest expense within 5.0x-6.0x.
In addition, the company's net leverage (excluding the cash
held at escrow accounts) should remain below 1.5x in 2020-21.
PIK is likely to retain its large cash buffer, which stood at RUB78
billion as of 30 June 2020. The company's financial policy
is prudent, with low net leverage, large liquidity sources,
debt financing in roubles, proactive management of its debt portfolio,
and reasonable dividends.
The rating also takes into account the company's (1) strong brand
recognition, (2) diversified project portfolio, (3) focus
on mass market segment which is more resilient to economic downturns,
(4) long track record and strong experience in construction and real estate
development, and (5) strong liquidity, underpinned by the
large cash balance and comfortable debt maturity profile. At the
same time, the rating incorporates (1) the industry's ongoing
transition to escrow accounts which weigh on the company's operating
cash flow generation, (2) weak macroeconomic environment,
and (3) the company's exposure to Russia's less-developed
political, regulatory and legal framework.
The assignment of the Ba3 long-term issuer rating, which
is an opinion of the ability of an entity to honour senior unsecured debt,
to PIK Corporation, reflects the structural and legal subordination
of its debt. PIK Corporation is a sub-holding entity directly
owned by PIK and established for the purposes of holding the group's
stakes in operating entities and issuance of debt, including unsecured
and unguaranteed local bonds. Its long-term issuer rating
is one notch below PIK's Ba2 CFR , to reflect the priority
ranking of PIK Corporation's unsecured and unguaranteed debt which
is structurally subordinated to the debt held by operating entities and,
in addition, legally to the debt provided to PIK's residential
real estate projects which is secured by the land and shares in some subsidiaries.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
The rapid spread of the coronavirus pandemic, deteriorated global
economic environment, low oil prices, and high asset price
volatility have created an unprecedented credit shock across a range of
sectors and regions. Moody's regards the coronavirus pandemic as
a social risk under its ESG framework, given the substantial implications
for public health and safety. However, the impact of the
pandemic on PIK's credit quality is limited. The lockdown
measures in Russia in the second quarter of 2020 did not lead to materially
adverse disruption in the company's operations or significant costs.
On the contrary, the company's quick adaptation to the new
operating conditions, coupled with the government's support
measures for the residential real estate market, has resulted in
PIK's strong operating performance over the last nine months,
with increasing sales and prices.
Governance considerations include PIK's concentrated private ownership
structure, with 59% shares in the company controlled by its
president Sergei Gordeev, which creates a risk of rapid changes
in the company's strategy, financial policies and development plans.
However, the owner's track record of a prudent and consistent approach
toward the company's development strategy, financial management
and corporate governance practices, as well as its public listing
on the Moscow Stock Exchange, with relevant disclosure, governance
requirements and four independent board members out of nine, partially
mitigate the risks related to corporate governance. The presence
of Bank VTB, PJSC (Baa3 stable) among the company's shareholders
with a 23% stake also provides additional oversight over PIK's
corporate governance, strategy and policies.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects PIK's comfortable positioning within
its rating category and Moody's expectation that the company will
maintain its high operating efficiency, strong financial performance
and solid credit metrics.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's does not anticipate a positive pressure on the rating to build
up over the next 18 months. In a longer term Moody's could consider
the rating upgrade if the company were to (1) demonstrate a sustainable
track record of robust operating and financial results amid volatile industry
conditions and continuing implementation of escrow accounts, (2)
maintain strong liquidity, and (3) pursue a conservative financial
policy. Quantitatively, the rating could be upgraded if PIK's
Moody's-adjusted gross debt/EBITDA were to be below 3.0x
and EBIT interest coverage above 6.0x on a sustainable basis.
Moody's could downgrade PIK's rating if its (1) Moody's-adjusted
gross debt/EBITDA were to increase above 4.0x and EBIT interest
coverage fall below 4.0x on a sustained basis; (2) operating
performance, cash generation or market position were to weaken materially;
or (3) liquidity were to deteriorate.
The principal methodology used in these ratings was Homebuilding And Property
Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
PIK is the largest vertically integrated homebuilder in Russia.
The company builds mass market apartment houses in 12 regions with a particular
focus on the Moscow city and the Moscow region. In 2019,
the company reported revenue of RUB281 billion ($4.3 billion)
and Moody's-adjusted EBITDA of RUB60 billion ($930
million). PIK's president Sergei Gordeev owns a 59%
stake in the company, Bank VTB, PJSC (Baa3 stable) --
23%, and the rest is in free float.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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