24 October 2022
Volga JSC, paper plant from Balachna (hereinafter referred to as the Company, the Plant) specializes in the production of packaging paper, paper from 100% thermomechanical mass for printing newspapers, books, textbooks and printing products. At the end of 2021, the Company entered the top 3 manufacturers of newsprint on the Russian market.
The assessment of the business profile is constrained by the risks of the industry in which the Company operates. The industry is subject to significant fluctuations in the prices of each type of paper, depending on the current demand for it. However, the level of demand is sensitive to changes in the macroeconomic situation. For example, the economic slowdown in China in 2022 and the redirection of Russian paper producers from the European market together led to a decrease in demand for packaging paper in the region, a surplus and a corresponding decline in prices. At the same time, the upcoming elections in China supported the demand for newsprint. In the domestic market, in the 2nd quarter of 2022, there was a decrease in the prices of packaging paper below the level of the Company's prime cost against the background of logistical problems with the export of products due to sanctions. In the 3rd quarter of 2022, the situation stabilized.
The strong marketing position of the company in both markets and the technological opportunity to switch to the production of a certain type of paper, depending on the margin, can significantly reduce the risks of changes in the global paper market, which is positively assessed by the agency.
The company has a wide distribution geography, in particular, at the end of 2021, 73% of revenue was generated through exports. Supplies of the Plant's paper products, in addition to the Russian market, are carried out in Asia, Europe, Africa and America, while the share of the Asian market in 2021 amounted to more than 51%. In 2021, the Company expanded the geography of supply of packaging paper to the markets of the Middle East and Africa, and also introduced new types of packaging paper to the Chinese market. The wide global geography of deliveries of the Company's products makes it possible to reorient supplies to the regions in a fairly short time.
The company has a moderately diversified product portfolio: the share of newsprint in total revenue for 2021 amounted to 36% (a year earlier it was 40%), the share of packaging paper is 47% (a year earlier it was 42%). By the end of 2022, the share of newsprint is expected to increase to 60%, which is due to logistical difficulties associated with the introduction of anti-Russian sanctions, the temporary suspension of domestic deliveries of packaging papers in the 2nd quarter, as well as an increase in the demand for newsprint in the Chinese market and more attractive prices for it. Adhering to the strategic project of technological re-equipment implemented at the production site in order to expand the production of packaging paper and cardboards, the company plans to increase the share of packaging types of paper in the product portfolio to 70% by 2025.
The company is fully supplied with its own electric power. Since the last update of the rating, the level of self-sufficiency in timber, taking into account counter-supplies, has increased from 25% to 27%, but is still estimated as low by the agency's benchmarks. The company aims to further increase the level of self-sufficiency in forest resources by taking steps to conclude a new contract for the implementation of a priority investment project in the field of forest development, which in the future will support EBITDA.
The level of debt burden of the Plant has a positive impact on the rating. As of December 31, 2021 (hereinafter referred to as the reporting date), the Company's net debt, taking into account financial lease obligations, was close to zero. Taking into account the large-scale investment program planned for implementation, the agency does not expect the net debt to EBITDA ratio to increase above 3.2x in the next three years, believing that the Company will be able to postpone part of the capital expenditures in the event of a deterioration in the price situation. The level of the Company's interest burden is also assessed by the agency positively: the coverage of interest payments with EBITDA ratio for all analyzed periods exceeds the agency's benchmark for the maximum estimate: 5.6x. Such positive values of the metric are due to the predominance in the portfolio of loans received at preferential interest rates under the export credit interest rate subsidy program, as well as the availability of preferential borrowing from the Industry Development Fund.
The profitability indicators of the Plant also have a positive impact on the rating level. In 2021, EBITDA margin increased to 23%. The agency expects that EBITDA margin will not fall below 17% at the horizon of three years from the reporting date, while at the end of 2022 EBITDA margin will show further growth relative to 2021 to 28% due to an increase in the average price of products sold. The Agency notes that the Company's foreign currency debt in 2021 was fully covered by export earnings. Until the end of 2022, the Company plans to convert the available limits on credit lines established in euros into yuan, which prevail in the structure of the Company's export revenue at the moment. Thus, taking into account the presence of natural hedges, currency risks are estimated at a moderately positive level.
Corporate risk unit is assessed as moderately positive. The Company has a six-person Board of Directors consisting of four independent directors. The quality factor of corporate governance is somewhat constrained by the absence of a collegial executive body. As part of the transparency assessment, there is a lack of publication of semi-annual IFRS reports. The Agency notes a high level of strategic planning and risk management.
According to IFRS reporting, the assets of Volga JSC as of Dec. 31, 2021 amounted to 10.5 billion rubles, the capital is 5.5 billion rubles. Revenue in 2021 amounted to 13.0 billion rubles, net profit is 2.7 billion rubles.
See the full version of the press release in the source: Expert RA confirmed the credit rating of Volga JSC at the level ruА- (raexpert.ru)
