Fitch Ratings has affirmed LSR's 'B' outlook stable

Fitch Ratings has affirmed LSR's 'B' outlook stable
Published: 20 July 2012

Tagged Under: Russia LSR Group 

Fitch Ratings has affirmed OJSC LSR Group's (LSR) Long-term foreign currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook and the senior unsecured rating of the outstanding bond issues at 'B'.

The affirmations reflect LSR's sustainably strong position as a developer and construction materials producer in its core region of St. Petersburg and Leningrad region, Fitch said. LSR continues to diversify geographically towards the highly concentrated Moscow and Moscow region residential housing where it has become one of the top-five developers. LSR is also expanding in Urals although this represents less than 5% of its real estate portfolio. LSR's real estate portfolio value is balanced with 45% accounting for the mass-market segment, 30% for the elite and business class segment, 16% held for future development and 9% for offices.

LSR's core business remains in St Petersburg and the adjacent Leningrad region, which account for 85% of its real estate portfolio, 70%-80% of concrete and bricks capacities, and 100% of cement capacities. Nevertheless, LSR's strategy to diversify towards the Moscow region and Urals is on track with new contract sales in the regions tripling in 2011. In July 2012, LSR signed a new 350,000 sq. m. residential housing project in Moscow resulting in increase of LSR's real estate portfolio in Moscow beyond 1Mm2.

With the launch of sales of a new low-cost cement plant in the second half of 2011, the company has fully covered its cement needs for 2012 and beyond, and become vertically integrated in all construction materials. Following the completion of vertical integration, LSR's investment programme has refocused on optimisation issues. In 2011, LSR reorganised its construction materials business units which led to lower administrative expenses, and is developing its greenfield brick plant project which will replace three outdated low-efficient brick plants. LSR also continues growth through small-sized selective acquisitions of construction materials businesses and land plots.

Fitch retains its positive medium-term outlook for construction and building materials in Russia, supported by growing real income and salaries and strong mortgage lending growth potential. Large-scale nation-wide infrastructure projects and its financing support from Federal Targeted Investment Programme also support the positive outlook for building materials and aggregates. Recent market dynamics are also positive and supported by the 7% growth in residential housing in 2011 (3.3% growth in January-May 2012). However, the industry is inherently capital intensive and is exposed to liquidity shocks.