The rating has been solicited by the counterparty, or by its intermediaries, and as such CRIF Rating Agency received a fee for the analysis performed.

Key rating factors – Strengths:

  1. Moderate Net Financial Position (NFP). IHF Group pre-final 2013 NFP is €7 million, net of the convertible bond loan (“CBL”) that we treat as Equity and including €4.8 million of the already announced upcoming bond issuance. Even considering the CBL as financial debt, CRIF Rating Agency believes that the Group’s NFP/Equity ratio remain moderate (1.3 in 2013) thanks to €9 million financial contribution in 2012-2013 (€6 million CBL and €3 million of capital increase). CRIF Rating Agency also expects this ratio to go down to 1 in 2016, after a planned second €3 million of capital increase in 2014 and expected cash flow generation.
  2. Future cash flows to serve the debt. Provided a total pay back of €4.8 million bond loan in 2016 or, alternatively, its fractioned pay back (30% in 2016 and 70% in 2017), CRIF Rating Agency believes that expected cash flows (which include additional €5.5 million short-term financial debt in 2014-2015 period) should serve the Group’s development process, even in case of lower than expected effective revenue growth rate in 2014-2017 Business Plan. Moreover, the possibility of non-conversion of the CBL is considered remote.
  3. High R&D investments and strategic partnerships. Group’s operations have always been oriented to high customisation and innovation (often in collaboration with strategic partners such as Nespresso and Designworks USA-BMW Group). As a consequence, R&D has reached an average of about €1.5 million per year (since 2011), and such figure is expected to remain constant along the whole 2014-2017 Business Plan. CRIF Rating Agency conservatively estimates that earnings from the new product lines (lightweight trolleys and American coffee automatic machines) will contribute to the consolidated revenues growth (estimated up to 30% in 2016).
  4. Presence in a market niche, high degree of product customisation and high entry barriers. IHF Group operates in a niche with high level of customisation but limited turnover, thus making this niche market unattractive for international big players (which realize high volumes with high level of standardisation), reducing competition. High entry barriers (usually difficulties in obtaining certifications, high initial investments and technical and administrative know-how) make the Group moderately exposed to new entrants’ competition.
  5. Diversified business profile. IHF Group is diversified both on a geographical basis (most of its revenues come from North America, Middle East, China, Russia, Germany, with Italy contributing solely by 2% of 2013 revenues) and on a customer portfolio (Group’s customers are major and high-budget spending carriers like Airbus, Boeing, Emirates and Lufthansa), thus reducing both operative and credit risks.


Key rating factors – Weaknesses:

  1. High value of intangibles. Goodwill counts for about 33% of total assets in 2013 pre-final consolidated balance sheet deriving from unexpressed economic potential of IHF’s start-ups subsidiaries. CRIF Rating Agency considers that impairment tests foreseen for each single year of the 2014-2017 Business Plan could lead to significant future devaluations, with a negative impact on EBIT.
  2. Inter-group liabilities and expired tax payments generate liquidity tension. The high level of liabilities for the ongoing structure reorganization process and the missed tax payments in the past few years (for which the Group has obtained a payment in instalments) are at the root of the negative Net Working Capital, which caused liquidity tensions in the past three years. The €4.8 million planned bond issuance is partly due to cover such financial constraint. CRIF Rating Agency believes that the ongoing activities forecast in the Business Plan will lead to positive Net Working Capital from 2014 onwards.
  3. Evolving operating structure and organization. Group’s structure results are not yet consolidated due to the start-up status of IHF’s subsidiaries. CRIF Rating Agency expects that this could be a potential limit for the Group’s projected higher profit margins. In fact, start-ups’ operating inefficiencies could negatively affect consolidated EBITDA margin (7% consolidated vs 24% of 2013 IHF individual pre-final), NFP/EBITDA ratio (3.3 consolidated vs 1.2 IHF individual pre-final with “CBL” treated as Equity, 2.2 with “CBL” treated as Debt) and net profits (€5.5 million consolidated loss vs €1.3 million profit of 2013 IHF individual pre-final). The governance reinforcement process is still ongoing, regardless shareholder IDeA SGR appointed highly skilled and experienced managers who are enhancing planning and control systems.
  4. Oversizing capacity leading to inefficiencies. As an aerospace industry’s feature, suppliers of big airplane manufacturers are often requested to have a higher capacity than their (actual) turnover, in order to guarantee airplane manufacturers’ time-to-delivery. This peculiarity has generated operating inefficiencies within IHF Group. CRIF Rating Agency assumes that the rationalization of the operating structure will lead the Group to overcome these inefficiencies during the next three years, thanks to the economies of scale and the internalization of processes actually outsourced.

Contacts

Lead rating analyst
Pietro Ragghianti
Tel.: +39-051.4176899
E-mail: p.ragghianti@crif.com

Supporting rating analysts
Rosa Esposto
Tel.: +39-051.4176363
E-mail: r.esposto@crif.com

Davide Tommaso
Tel.: +39-051.4176874
E-mail: d.tommaso@crif.com

Approval
Armando Guermandi, Rating Committee Chairman
e
Ramona Rabbi, Member of the Rating Committee

Additional analytical and methodological information can be found on the website www.creditrating.crif.com
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