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RAEX (Expert RA) confirmed the SGM rating at ‘ruBBB’ level
31.08.2018
Rating agency RAEX (Expert RA) confirmed the credit rating of non-financial company STROYGAZMONTAZH at ruBBB level. The outlook on the rating is stable.

The SGM Group (hereinafter referred to as the "Group") is the leader of the oil and gas segment of the infrastructure construction sector, executing mainly contracts of the Gazprom group investment program. Among the successfully implemented projects, there are creation of the Sakhalin – Khabarovsk – Vladivostok gas transmission system, the Bovanenkovo – Ukhta trunk gas pipeline system (1 string), the Ukhta – Torzhok gas pipeline (1st stage), the Dzhubga – Lazarevskoye - Sochi gas pipeline, the South-European trunk gas pipeline.

The projects are characterized by their scale, federal significance, and technical complexity: laying pipelines in seismic areas, rocky soils, on the seabed, in the climatic and natural conditions of the Far North, with virtually no infrastructure. At the moment, the main projects of the Group are contracts within the construction of the main gas pipelines such as the Power of Siberia, Ukhta - Torzhok (2nd stage), the Urengoy – Pur-Pe oil condensate pipeline, the program "Development of gas transportation capacities of the UGSS of the North-West region (Gryazovets –Slavyanskaya CS section)", overhaul of gas pipelines and the federal program of gasification of regions. In addition, the company is the general contractor for the construction of a transport crossing of the Kerch Strait (bridge) and the reconstruction of the International Children's Camp "Artek" in Crimea. The federal status of most of the Group's projects allows the agency to evaluate high the geographical diversification of its business.

The agency continues to assess the prospects for the development of the infrastructure construction industry as moderate due to its high level of cyclicality. At the same time, the agency notes that, on the one hand, the Group's focus on the implementation of Gazprom's investment program, as well as its successful and long-term experience with the largest customer of the industry is an important competitive advantage that partly allows mitigating industry risks. On the other hand, having a portfolio of orders with a high proportion of one customer and the dominance in the structure of planned revenues from certain large projects are concidered by the agency as a risk factor. Thus, in the residual value of the existing contractual base as of December 31, 2017 (hereinafter referred to as the reporting date), about 82% of the revenues fall on three large projects. This is partially offset by the significant volume of awarded contracts covering the Group's revenue for the year 2017 by more than 1.7 fold and the Group's debt as of the reporting date, taking into account the issued guarantees, by more than 6.5 fold.

Following the results of 2017, the Group demonstrated a steady growth in operating indicators compared to 2016: revenue increased by 29% to 281 billion rubles, EBITDA, according to the agency, by 26% to 27.8 billion rubles, the operating cash flow before interest payment more than tripled to 24 billion rubles. The EBITDA margin for the period was about 10%, unchanged from 2016, which is estimated as a moderate high level. At the same time, the agency notes that since the Group's activities are related to the implementation of large-scale long-term projects, its financial performance may vary from period to period, depending on the construction period and the degree of completion of the project.

Thus, the agency expects that the Group's operating cash flow will be negative by the end of 2018 due to the need to finance new contracts under the project "Development of gas transportation capacities of the UGSS of the North-West region (Gryazovets – Slavyanskaya CS section)". This will require the Group to raise additional financing debt, most of which is either already contracted or is in the final stage of approval.

Due to this, the level of the Group's forecast liquidity is estimated by the agency as strong: the balance of cash, short-term financial investments, adjusted for quality, and not-reached limits of long-term credit lines cover projected outflows from operating activities, dividends, capital expenditures, debt servicing costs and repayments of investment loans according to the schedule by more than 1.25 fold.

The group has reduced the amount of debt since the last update of the rating from 75 billion rubles as of June 30, 2017 to 67 billion rubles as of the reporting date, while the volume of issued guarantees, which are treated by the agency as a debt, has grown from 2 billion rubles up to 2.8 billion rubles for the same period. The agency expects that the Group will increase the volume of debt obligations following the results of 2018 to 88 billion rubles taking into account guarantees, as a result of which the agency estimates the ratio of the forecasted debt to EBITDA for 2017 to be about 3.2 fold, the ratio of operating cash flow before interest payments to the forecasted debt is about 27%, which is estimated as a moderate level of debt burden. The current debt load of the Group is also estimated as moderate: the ratio of interest payable in 2018 to EBITDA for 2017 is 0.38 taking into account the repayment of investment loans on schedule is 1.27. The Agency expects that the Group will successfully complete negotiations with PJSC MOSOBLBANK on replacing the credit lines that expire in 2018 with new ones with maturity no earlier than the end of 2019.

More than half of contract costs are financed by advance payments from customers, as well as deferred payments with subcontractors and suppliers, which explains the moderately high degree of diversification of liabilities for creditors: the share of the largest creditor of the Group, PJSC MOSOBLBANK, is at the reporting date no more than 28% of the balance currency.

A low level of currency risk also continues to have a positive impact on the rating level, since all settlements under contracts are made in rubles. At the same time, the agency estimates as moderately low the level of "stress" liquidity of the Group: coverage of assets-adjusted liabilities of the Group as of the reporting date was 0.78. The main pressure on the indicator was provided by the availability of loans in favor of related persons in the amount of about 24 billion rubles, whose level of repayment the agency cannot assess as high.

In the corporate block of risks, the lack of an officially approved dividend policy and a low level of information transparency (the Group does not publish its financial statements publicly) continue to exert a deterrent effect on the rating. At the same time, the agency understands that the decision to pay dividends is dictated by the Group's financial capabilities and does not expect the growth of the debt burden, motivated by a material outflow of capital for shareholder purposes. The Agency's assessment of the level of development of risk management of the Group takes into account the fact of accruing in 2017 reserves for funds in deposit accounts in the amount of 2.5 billion rubles. The reserve was formed in connection with the revocation of the license of a bank that did not have a credit rating. The high quality of strategic planning and the concentrated ownership structure continue to have a positive impact on the rating.

According to the audited IFRS financial statements for the year 2017, the Group's revenues amounted to 280.6 billion rubles, net profit was 13.7 billion rubles, equity as of December 31, 2017 amounted to 27.3 billion rubles, and assets were 214.9 billion rubles.
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