ACRA assigns BB- to NC Food Contract Corporation JSC under the international scale, outlook Stable

The credit rating assigned to NC Food Contract Corporation JSC (hereinafter, the Company) under the international scale is based on the Company’s b standalone creditworthiness assessment (SCA), the Company’s medium systemic importance for the Republic of Kazakhstan (ACRA rating under the international scale — BBB+, outlook Negative; hereinafter, Kazakhstan), and Kazakhstan’s strong influence on the Company’s activities, including the high likelihood of support in the event of deterioration of the Company’s financial standing. Considering these factors, the Company’s rating has been assigned at the SCA plus two notches, which is equal to BB-.

The Company’s SCA reflects the small size of its business, medium level of the product and geographical diversification, and also the low level of vertical integration and very low market share. The assigned rating also is a reflection of the fact that the financial risk profile of the Company is characterized by high leverage (taking into account new borrowings) and low coverage of interest payments. However, ACRA notes the sufficiently high profitability and medium liquidity of the Company.

The Company holds the status of a national company of Kazakhstan. Its main function is to ensure the food security of the country through quantitative and qualitative preservation of the food grain reserve and also through contributing to the stabilization of the domestic grain market and the development of exports. In accordance with Decree of the Government of the Republic of Kazakhstan dated May 27, 2020, 100% of the Company’s stocks were transferred to state ownership. The rights to hold and use this block of shares has been transferred to the Ministry of Agriculture of the Republic of Kazakhstan. Previously, the Company was wholly owned by “KazAgro” National management holding” JSC, an entity controlled by the state.

Key rating assessment factors

Medium business profile compared to global companies. The Company is solely a grain trader. The food fund consists mainly of wheat grain. The average annual volume of sales of grain from 2016 through 2019 was around 500,000 tons, with around 50% of sales taking place in Kazakhstan’s domestic market. The Company exports grain to countries such as China, Azerbaijan, Turkmenistan, Tajikistan, Georgia, Iran, and Uzbekistan. However, compared to global traders, the extent of the Company’s operations are rather local in nature. In ACRA’s opinion, the Company’s primary focus on trading grain is a limiting factor in the assessment of product diversification and the share of products with high value added. When assessing vertical integration, ACRA took into account the existence of the Company’s own grain receiving enterprises, and also its long-term contracts with approximately 100 grain receiving enterprises that store grain throughout Kazakhstan. The Company’s own grain terminal (Ak Biday-Terminal JSC), which is located on the east coast of the Caspian Sea at Aktau Sea Port and Baku Grain Terminal LLC, owned by the Company on an equal footing with a partner, is also a positive factor in the assessment of the Company’s business profile.

The Company’s exposure to climatic risks due to its presence in one geographic region was taken into account when assessing the business profile in terms of geographic diversification. Specifically, in 2019 Kazakhstan suffered a crop failure and was forced to import large volumes of grain from Russia. The low cereal yield led to growth in the cost price of Kazakh grain, which impacted pricing in the domestic market.

One of the key tasks that the state has assigned to the Company is the stabilization of the domestic grain market, which at certain points may lead to a decline in its profitability. Therefore, the potential for instability of harvests in the region increases the risk of high volatility of the Company’s financial indicators.

The Company’s operations are very narrow by global standards, and its share in the global grain market is very small. These aspects determine the very low assessment of the “market share” sub-factor.

The assessment of corporate governance factors corresponds to the average value for the international corporate segment in ACRA’s opinion. The Company’s strategy is based on the state’s long-term agriculture development plans. The Company has drafted a new strategy for 2021–2030 following the transfer of the Company’s stocks to state ownership, and taking into account new risks and the substantial changes to the external environment. This draft is currently being approved by government bodies. At the moment, due to the change in the structure of share capital, the composition of the board of directors is being changed. The previous board of directors included two independent directors. The Company will continue to include independent directors in the future.

The financial transparency of the Company is average by international standards: the Company regularly publishes audited IFRS financial statements and annual reports for investors, and periodically releases overviews of the situation in the grain market.

The Company’s financial risk profile limits the SCA. The Company’s business size is small and is measured by annual revenue in dollars. In the near future, the Company plans to significantly grow its business by doubling the volume of grain sales. The Company plans to attract debt financing for this in 2020, which should lead to an increase in leverage of up to 15.6x for the year. According to ACRA, this indicates a high level of leverage. ACRA expects this figure to fall to 4.5x by 2022 as operating profit increases due to business volume growth and leverage decreases.

The Company’s earnings before interest and taxes (EBIT) was high for 2019 at 15%, but this indicator is highly volatile due to changes in the volume of sales and purchases of grain. ACRA expects this figure to average 16% in 2020–2022, bringing annual grain sales to about 1 million tons.

ACRA estimates that the Company’s liquidity is at an average level. As of the beginning of July 2020, the Company’s liquidity equaled KZT 16 bln, including repayment of the loan to Citibank Kazakhstan JSC. ACRA expects that by the end of 2020 (given grain purchase operations), liquidity will be about KZT 12 bln, which is enough to repay the loan from the shareholder in 2021.

Medium systemic importance and strong state influence. Since 2007, the Company has held the status of being a national company of Kazakhstan and implements the state policy in the field of food security and grain market stabilization. The Company’s mission as the state operator in the grain market was established at its creation in 1995. According to the Decree of the Government of the Republic of Kazakhstan, dated March 28, 2011, and the trust management agreement, the Company was the sole agent in managing non-reduced state grain reserves. The Company was responsible for the formation, storage, refreshment, movement, and use of state grain resources. In accordance with the instructions of the President of the Republic of Kazakhstan, the Company approved the formation of minimum wheat reserves in the amount of 500,000 tons. The Company controls these reserves and receives all the benefits from managing the grain.

Regarding the degree of state influence on the Company’s activities, ACRA notes the presence of state representatives on the Company’s Board of Directors, as well as the financial support that the state has provided to the Company since its establishment. However, the level of this support has changed over time. From 2000 to 2015, the Company was provided with funds directly from the national budget to compensate part of the cost of storing the grain reserve. From 2010 to 2016, the Company was granted budget loans at a preferential rate. Preferential loans were also provided through its sole shareholder, the state-owned “KazAgro” National management holding” JSC. With the transition of the Company to direct state control represented by the Ministry of Agriculture of the Republic of Kazakhstan, the degree of state influence will increase. As such, at the beginning of 2020, in order to provide agricultural producers with financial resources for the sowing campaign, as well as to ensure guaranteed sales of agricultural products, the state provided an additional KZT 24.5 bln in capitalization to the Company (for the program of forward purchase of agricultural crops).

Key assumptions

  • Grain reserve increasing to 1.5 mln tons under the management of the Company;
  • Annual sales and grain purchases increasing to approximately 1 mln tons in 2021–2022;
  • No dividend payments.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Reduction in leverage (the ratio of total debt to FFO before net interest payments) below 7.0x with an increase in FFO before net interest payments to interest payments above 3.0x;
  • Increased financial influence from the state on company activities.

A negative rating action may be prompted by:

  • Drop in EBIT below 10%;
  • Leverage (the ratio of total debt to FFO before net interest payments) remaining above 7.0x with a decrease in FFO before net interest payments to interest payments below 1.0x
  • Reduced liquidity due to difficulties in accessing debt financing.

Rating components

SCA: b.

Adjustments: SCA plus 2 notches.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State under the International Scale, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to NC Food Contract Corporation JSC for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by NC Food Contract Corporation JSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of NC Food Contract Corporation JSC. The credit rating is solicited, and NC Food Contract Corporation JSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by NC Food Contract Corporation JSC in its financial statements have been discovered.

ACRA provided no additional services to NC Food Contract Corporation JSC. No conflicts of interest were discovered in the course of the rating process.

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