Car Maker UzAuto Motors affirmed At ‘B+/B’ on recovery prospects; outlook remains stable
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed the rating of UzAuto Motors at ‘B+/B’ on recovery prospects. Outlook remains stable
Like other auto producers around the world, UzAuto Motors was affected by ongoing supply chain bottlenecks and semiconductors shortage in 2021. We therefore now expect production of about 235,000 units only for full-year 2021, compared with the company’s May guidance of 300,000-305,000.
The decrease was partly offset by a larger contribution from higher-margin premium segment models, and we have revised our estimate of UAM’s 2021 EBITDA to US$200 million–US$220 million from US$240 million-US$260 million. For 2022, we assume production will recover to 280,000-290,000 units, or about 80% capacity utilization, on a gradual easing of chip supply shortage and rising sales of microvans, which do not require chip installations.
However, the increase in volumes will be offset by spending associated with the GEM platform, which includes equipment renewal to retire old models and start production of GM’s specifically designed emerging markets models.
Margins will be further pressured by increasing foreign exchange (FX) cost inflation, especially for premium models, whose components are mostly imported. As a result, EBITDA will stay at US$200 million–US$220 million in 2022, similar to that in 2021. At the same time, we expect debt accumulation to finance capital investments in 2022, including a US$300 million bond issue in 2021 and ECA funding totaling about US$160 million, including UAM’s cross-default guarantees to sister company, Powertrain.
This will lead to funds from operations (FFO) to debt falling to about 35% in 2022 from about 70% in 2020 and 50%-55% in 2021. The expected volatility of credit metrics is largely captured in our current significant financial risk profile, but weaker EBITDA or FOCF in 2022 than currently assumed could result in negative rating action.
We expect working capital outflow in 2022 to deliver on prepaid orders will reduce the US$330 million of cash accumulated last year, thereby pressuring liquidity in the absence of ECA funding.
The semiconductors shortage led to inventory buildup in 2021, but this was almost fully offset by prepayments from customers, resulting in working capital inflow of US$230 million –US$250 million for 2021. Combined with EBITDA generation of US$200 million-US$220 million and capital expenditure (capex) of about US$310 million, this resulted in positive FOCF and cash of about US$330 million by the end of 2021, about half of which is in hard currency. However, we expect that some orders related to the prepayments will be delivered this year, resulting in a meaningful working capital outflow of US$200 million–US$250 million in 2022. Combined with planned investments of about US$80 million in the GEM platform, this will lead to negative FOCF of US$100 million-US$150 million. Rating pressure might build if UAM fails to attract the envisaged ECA funding by the end of the first half of 2022.
We also note UAM has revised payables terms with its main supplier, GM Korea, resulting in the payables period increasing by 60 days and sizeable cash inflow of US$233 million in first-half 2021. We understand this was a temporary measure to fund the company’s switch of letter of credit agreements to international banks from local banks. We expect payables terms to return to historical levels by the end of the year. Because we assess changes in payables terms as temporary and UAM’s liquidity position as otherwise still adequate, we don’t apply a debt adjustment for these additional funds. However, we will continue monitoring payables terms and add the funding to debt if we assess the revision of terms to be akin to financing, which will likely lead us to revise our assessment of UAM’s stand-alone credit quality.
The company is well positioned to face increasing competition in the domestic market.
Kia and Renault have recently announced plans to launch semi-knocked-down production (where cars are partly stripped, imported, and reassembled) of up to 25,000 units in Jizzakh region, and fully localize production in the medium term. We estimate these longer-terms plans will add up to 100,000 units, although some will be exported. This is a sizeable addition to the market, compared with UAM’s production capacity of 360,000 units. However, we still expect UAM can sustain its quasi-monopolistic position, supported by its prices being lower amid broad localization and cost optimization following the GEM platform launch, as well as low auto usage and strong demand for new vehicles. We also expect UAM’s recently appointed CEO, Bo Inge Andersson, to lead cost optimization and expansion to neighboring countries, diversifying the company’s end markets and supporting its dominance in the domestic market.
The unexpected increase in capital investments of about US$80 million in the first half of 2021, related to additional projects at UAM’s subsidiaries, does not change our view of the company’s ability to contain leverage.
During 2021, some of UAM’s subsidiaries initiated additional projects that we estimate at about US$80 million. These projects are financed with cash on UAM’s balance sheet, and we understand the company expects further reimbursement of these expenses, although the timing is unclear and not included in our base case. We regard these as one-off spending items, while in the forecast period we expect both UAM and parent company UzAuto Sanoat to adhere to their initial projects pipeline, with no debt accumulation beyond that outlined in our base case.
We assess credit quality of parent company UzAuto Sanoat as in line with that of UAM.
We assess the group credit profile of UzAuto Sanoat, which owns 100% of UAM, as being at the same level as UAM’s stand-alone credit profile. The group continues to benefit from its quasi-regulation function, controlling auto manufacturing enterprises and auto localization, and from diversification into other segments such as heavy trucks and engines as well as components production. However, additional debt of US$180 million-US$200 million to finance capex at other subsidiaries and UAM’s contribution of about 70% to the group’s EBITDA, limit headroom for potential group support. Moreover, we expect no new major projects at the parent company until the GEM platform is fully ramped up.
UAM’s plans for an IPO of a minority stake is unlikely to change our view of its link with the government.
The company plans an IPO in Uzbekistan in the second half of 2022 of up to 5% of its capital is subject to government approval. We regard as positive that the government will keep a controlling stake in the company, which supports our view that the likelihood of UAM receiving extraordinary government support won’t change. Moreover, the potential entry of international investors could further enhance transparency and the implementation of best corporate practices. We still believe our assessment of a high likelihood of extraordinary government support captures the group’s importance to the local economy as a national auto producer and large employer, as well as the government’s influence on UAM’s strategic and business plan through its board of directors, and its track record of previous support through favorable loan rates and market regulation.