Summary of the Rating Report. Scholz Group. 19 September 2018

Transcription

1 Summary of the Rating Report

2 Content Issuer rating 1 Rating rationale 2 Rating history 2 Company 3 Appendices Appendix 1 Appendix 2 Appendix 3 Execution Rating categories Definition of financial ratios Euler Hermes Rating GmbH 2018

3 Issuer rating Issuer rating Outlook B- positive Industry Trade and recycling of ferrous and non-ferrous scrap metal 2017 revenue 2.2 bn 2017 employees 3,485 BUSINESS RISK increased ANCHOR RATING Modification 1 STAND-ALONE-RATING Modification 2 ISSUER RATING B Operational risks B- External influence B- FINANCIAL RISK increased to slightly increased BUSINESS RISK increased OPERATIONAL RISKS - 1 Increased market risk due to the highly cyclical nature of and intense competition in the recycling industry Slightly increased strategic risk due to weak product diversification with a low potential of diversification and a good international market position Adequate resources for the realization of strategic goals Sustainable management, company and organizational structures are currently being established FINANCIAL RISK increased to slightly increased EXTERNAL INFLUENCE ± 0 Profitability at the low end of the satisfactory range Overall satisfactory capital structure Adequate financial flexibility Financials expected to continue to stabilize Shareholder is likely willing, but not contractually obligated, to provide external support No modification to the stand-alone-rating Financial ratios * 2015 actual 2016 actual 2017 actual** EBITDA margin (%) Return on capital employed (ROCE) Equity ratio (%) Debt to equity ratio (%) Total liabilities / EBITDA Net financial liabilities / EBITDA EBIT interest coverage EBITDA interest coverage * adjusted in accordance with EHRG s analysis principles **pro forma Euler Hermes Rating GmbH

4 Rating rationale Euler Hermes Rating has raised the s credit rating to B- with a positive outlook. This is a direct response to an expected long-term improvement in the company s profitability and financials. We expect operating profitability and the capital structure to improve over the next twelve months. Increased business risk due to a highly cyclical market and weak product diversification with minimal potential for differentiation We rate the 's business risk as increased. On the market risk side, the rating is negatively affected by dependence on the highly cyclical steel industry, highly volatile commodities prices and fierce competition in the recycling industry. As far as strategic risk is concerned, we view the s weak product diversification and minimal service portfolio differentiation as rating weaknesses. Its strengths include site networks in Germany, Eastern Europe and North America as well as strong logistics and recycling capabilities that enable superior supply security and high, consistent steel quality. Opportunities for future growth include an expansion of the company's service portfolio, the further optimization of its operational structures and processes and the exploitation of synergies with Chiho Environmental Group Ltd (CEG). Financial risk reduced to increased to slightly increased due to improvements in capital structure and profitability Adjustment to the anchor rating due to operational risks: - 1 notch We believe that the s financial risk improved in the last financial year and so have lowered its financial risk score from increased to significantly increased to increased to slightly increased. The company s equity returned to clearly positive territory in 2017 due to various corporate actions. Liabilities were reduced significantly. Operating profitability has improved now that the has completed its financial reorganization, which still weighed heavily on the company in Profitability is supposed to improve even more in the short to medium term as a result of cost-cutting and efficiency improvement programs. Based on the monthly reports provided to us, we assume profitability will increase in the course of this financial year. All told, we rate the s profitability as on the low end of the "satisfactory" range. We classify its financial flexibility as adequate. Operational risks, in our opinion, include the recent absence of consistent management associated with the as-yet uncompleted strategy process and ongoing changes to corporate and organizational structures. We have allowed for operational risks by lowering the anchor rating one notch. The new shareholder, Chiho Environmental Group Limited, has invested heavily in the. It has no obligation to provide additional financial contributions outside of the loans it has extended. We rate the external influence as neutral overall. Rating history 27 February 2018 Rating CCC B- Outlook positive positive Euler Hermes Rating GmbH

5 Company Trade and recycling of ferrous and non-ferrous scrap Scrap is collected directly from customers and at Scholz scrap yards Chiho Environmental Group Limited of Hong Kong holds 80% of the shares The s management The generated 2.2 billion in consolidated revenue from trade and recycling ferrous and non-ferrous scrap in the 2017 financial year. During this period, it employed an average of 3,485 people and handled around 6.4 million metric tons of scrap. It operates over 200 collection and recycling sites in 20 countries, including more than 110 facilities in Germany. All of the company s processing yards and major storage yards have private rail sidings. Over 80% of the recycled scrap is transported by rail. However, the has a fleet of over 800 container trucks and more than 100,000 shipping containers as well. It also transports scrap by inland vessel and ocean-going ship. The company s machinery and plant inventory comprises more than 20 shredders as well as shears, presses, drop impactors and hydraulic excavators. In the third-party trading business, scrap is transported directly from sources to buyers. In the storage business, scrap is transported to the nearest recycling centre for processing. The buys scrap from metalworking operations, demolition and gutting projects and consumer goods (cars, washing machines, refrigerators, etc.), particularly in southern and eastern Germany, Eastern Europe, Austria, Denmark and the United States. Scrap is collected directly from industrial and commercial facilities under waste disposal contracts or is dropped off at the s scrap yards in small quantities. Other services include dismantling of rolling stock, demolition work, container services, development of integrated waste management systems, contract briquetting and cable dismantling. Its main sales markets are Germany (approx. 40% of revenue), the United States, Austria, Italy, Belgium, Turkey and China. The company sells scrap to steel mills that use electric arc and basic oxygen furnaces, foundries as well as aluminium and copper smelting plants. Its customers include Voestalpine, ArcelorMittal and ThyssenKrupp. In December 2016 Chiho Environmental Group Limited (CEG, formerly Chiho-Tiande Group Limited), whose shares trade on the Hong Kong Stock Exchange (ISIN: KYG4465A1004), took over the by acquiring all shares of Scholz Holding GmbH. Before that, it had purchased most of the senior debt from creditors. After a cash capital increase in June 2017, Chiho Environmental International Holding holds 80% of the capital in Scholz Recycling GmbH, the s operating entity. Scholz Holding GmbH remains shareholder of Scholz Recycling GmbH with a stake of 20%. The senior management of Scholz Recycling GmbH consists of Dr. Klaus Hauschulte (Chief Executive Officer since 1 February 2018), Kian Guan Goh (Chief Investment Officer), Jochen Fischer (Chief Financial Officer) and Dr. Gerd Hähne (Chief Executive Officer for Germany/ Poland). Henry Qin, who served as the CEO of Scholz Recycling GmbH until the end of January remains a member of the senior management and is Executive Chairman of the Board of the Chiho Environmental Group. Dr. Hauschulte also belongs to the extended management of CEG. Mr Goh serves as the Chief Investment Officer of CEG concurrently with his position at Scholz. Dr. Hauschulte has extensive management experience in several industries and areas. He has last served as COO of the wind power sector at Siemens AG. Euler Hermes Rating GmbH

6 Appendix 1: Execution Please note This report is a condensed summary of the detailed rating report of. The detailed rating report, which is submitted to the company and is not being published by Euler Hermes Rating GmbH, forms the basis for the rating notation. Analysts Rating committee Katia Winkler, rating analyst and project manager Holger Ludewig, director Kai Gerdes, director Jörg Walbaum, senior rating analyst Principal sources of information Consolidated financial statements for 2015, 2016 Pro forma balance sheet and income statement for 2017 Excerpts from internal reporting (e. g. business performance in 2017 and 2018, list of financial liabilities, etc.) Market analyses Strategy paper and corporate planning Documents on group structure Interviews with the management of Scholz Recycling GmbH Rating methodology Issuer rating of Euler Hermes Rating GmbH of May 2016 ( Euler Hermes Rating GmbH Friedensallee Hamburg Tel.: +49 (0) 40/ GERMANY info@eulerhermes-rating.com Euler Hermes Rating GmbH

7 Appendix 2: Rating categories Category Explanation AAA AA A BBB BB B CCC CC C D / SD In the opinion of EHRG, AAA rated entities demonstrate an excellent credit quality and the lowest default risk. In the opinion of EHRG, AA rated entities demonstrate a very high credit quality with a very low default risk. In the opinion of EHRG, A rated entities demonstrate a high credit quality with a low default risk. In the opinion of EHRG, BBB rated entities demonstrate a medium credit quality with a moderate default risk. In the opinion of EHRG, BB rated entities demonstrate a medium-low credit quality with a slightly increased default risk. In the opinion of EHRG, B rated entities demonstrate a low credit quality with an increased default risk. In the opinion of EHRG, CCC rated entities demonstrate a very low credit quality with a high default risk. In the opinion of EHRG, CC rated entities demonstrate a very low credit quality, an event of default is very likely. In the opinion of EHRG, C rated entities demonstrate a very low credit quality, an event of default is imminent. D rated entities have defaulted, as defined by the rating agency. The rated entity is assigned an SD rating (Selective Default) if it has only defaulted on certain debt obligations. PLUS (+) MINUS ( ) Rating categories from AA to CCC are modified by a PLUS (+) or MINUS (-), where required, in order to show their relative position within the rating category. Euler Hermes Rating GmbH

8 Appendix 3: Definition of financial ratios Earnings potential and profitability EBITDA margin EBITDA margin EBITDA Total revenues Returns ROCE Adjusted operating result (= EBIT) Net financial liabilities + economic Equity (= capital employed) Total return on capital Adjusted operating and financial result + Interest expense Adjusted total capital Cash flow return on investment Cash flow return on investment (cash flow ROI) EBITDA Adjusted total capital Euler Hermes Rating GmbH

9 Capital structure and debt to equity ratio Debt Equity ratio Adjusted equity (= economic capital) Adjusted total capital Debt to equity ratio Net financial liabilities Net financial liabilities + economic Equity (= capital employed) Net financial liabilities Net financial liabilities Bonds + Liabilities to banks + Bill liabilities + Other interest-bearing liabilities + Operating lease liabilities + Adjustments for ABS/factoring transactions - Cash and cash equivalents Degearing periods Total liabilities / EBITDA Total capital - economic capital (= total liabilities) EBITDA Net financial liabilities / EBITDA Net financial liabilities EBITDA Interest coverage EBIT interest coverage Adjusted operating result (= EBIT) Interest expense EBITDA interest coverage EBITDA Interest expense Euler Hermes Rating GmbH

10 Disclaimer (client and rated entity) engaged Euler Hermes Rating GmbH to conduct a rating on 8 June The company was visited on 23 August The Rating Committee of Euler Hermes Rating GmbH reviewed the rating process, issued the rating notation and approved the rating report in its current form on. This rating report was given to the client on 10 October 2018, thereby concluding the rating process. The rating is Euler Hermes Rating GmbH s opinion of the creditworthiness of a rating subject. It is not a statement of fact. Euler Hermes Rating GmbH is not engaged in buying or selling securities. Its rating report is neither a prospectus nor a substitute for information assembled and presented by companies or issuers for investors regarding the purchase of a security or for assessing the creditworthiness of a rated entity. The rating is not a recommendation to participate in certain facilities. All recipients of the information must conduct their own independent analyses, credit assessments and other verifications and evaluations that are customary and necessary in order to reach a final decision about participating in any facility. The rated entity is solely and exclusively liable for any errors and omissions in the documents and information openly and willingly provided to us in response to our requests for information. The rated entity has reviewed the rating report and certified that all the information considered in the rating report is accurate and complete in all significant respects, no significant aspects have been concealed and any forward-looking statements are based on plausible, verifiable and current data and were prepared by the rated entity exercising reasonable and commercial care. The rated entity's representatives have issued a written certification of completeness to Euler Hermes Rating GmbH. However, the rated entity cannot be held liable if actual results differ from the forward-looking statements presented in this document, particularly the projections. Forward-looking statements and projections may be adversely affected by unforeseeable events and changes in the economic environment. Euler Hermes Rating GmbH assumes no liability for the accuracy of the information it considers when issuing a rating and extends no guarantee whatsoever that the information is explicitly or implicitly correct, timely, complete, suitable for the market or fit for any particular purpose. The rating is published on Euler Hermes Rating GmbH s website ( or published for subscribers (e.g. on a portal) and will be followed by a subsequent one-year monitoring process. During this period, the rated entity and the sector and business environment in which it operates will remain under observation. The representatives of the rated entity remain subject to a full disclosure obligation during this period. Any change in Euler Hermes Rating GmbH s rating assessment will result in a change in the published rating notation, meaning that this notation represents the current rating assessment at all times. The rating will only remain published after the end of the monitoring period if a follow-up rating is performed. Please note that summaries of contracts, laws and other documents contained in the rating report cannot replace careful study of the complete texts. Euler Hermes Rating GmbH cannot guarantee that the information used to prepare this report has not changed since it was collected and is still accurate at the time of publication. Euler Hermes Rating GmbH is under no obligation to complete the information that it considered when issuing the rating. The dissemination and use of this rating report may be prohibited by law in certain jurisdictions. Euler Hermes Rating GmbH therefore recommends that any persons who come into the possession of this information inquire about and comply with any prohibitions that may be in place. Euler Hermes Rating GmbH assumes no liability of any kind with respect to the dissemination and use of the rating in any jurisdiction whatsoever. Euler Hermes Rating GmbH Hamburg, 10 October 2018 Euler Hermes Rating GmbH