Bangkok--19 Dec--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Bangkok Aviation Fuel Services Public Company Limited's (BAFS) National Long-Term Rating at 'A+(tha)' and revised its Outlook to Negative from Stable. Simultaneously, Fitch has affirmed BAFS's National Short-Term Rating at 'F1(tha)'.
The Outlook revision reflects the expectation that the company's financial leverage will increase to a higher level than previously forecast and it will take more time than expected to deleverage to a level commensurate with the current rating. The increase in leverage is due to additional capex for a new pipeline project as well as weakening operating performance in 2017 after an increase in the excise tax on jet fuel. The Outlook revision also reflects a reduction in the company's ability to undertake any material debt-funded capex and absorb project variations, cost overruns or delays.
KEY RATING DRIVERS
Leverage Above Tolerance Levels: Fitch expects a recently announced increase of THB1.7 billion in the investment cost for BAFS's oil pipeline project to the northern Thailand to raise its FFO-adjusted net leverage to 3.0x-3.5x over 2018-2019, from our previous expectation of 2.5x-3.0x. BAFS is likely to deleverage and return to within 2.0x, the tolerance level for its rating, in 2021 or after two full years of operation of this new pipeline.
Tax Dampens Demand Growth: Fitch expects BAFS's uplift volume (the amount of fuel supplied to aircraft) to increase at about 3% a year over the medium term, slightly lower than 4%-5% previously expected. An increase in the excise tax imposed on jet fuel for domestic routes since early February 2017 is likely to curb growth in uplift volume in 2017 to less than 2.0%, compared with 7%-9% over the past two years. Nonetheless, Fitch expects demand growth over the medium term to still be supported by recovery in the local and global economies, continued growth in Thai tourism as well as expansion at Suvarnabhumi Airport (SA) and Don Muang Airport (DMK), the two largest international airports in Thailand.
Dominant Market Position: The ratings of BAFS reflect its dominant position in Thailand's aviation fuel service market. BAFS is the sole operator of the fuel depot and hydrant network at SA, the country's largest international airport. It is also the major into-plane fuelling service provider at the airport, with about 88% market share by volume. The company faces limited competition, and benefits from high barriers to entry as concessions from the airport operator are required to provide aviation fuel services at airports.
Limited Exposure to Oil Prices: BAFS is insulated from the volatility of fuel prices as its revenues are derived solely from fuelling service fees, while fuel is sold by oil companies to airlines. BAFS's major cost is its pre-agreed concession fee, which means that profitability is stable.
DERIVATION SUMMARY
BAFS's operating cash flow profile is close to those of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable), PTT group's flagship power company, and BTS Group Holdings Public Company Limited (BTSG, A(tha)/Rating Watch Negative), the operator of the skytrain network in Bangkok. GPSC's revenue is derived from contracted power and stream sales to customers with strong credit profiles while about 30% of BTSG's revenues are from a concession business that does not have a direct competitor, that is, revenue from operational and maintenance services for Bangkok's skytrain system. These companies, therefore, have highly predictable and stable earnings. All of them have low financial leverage at about 1.0x at end-2016, although the financial leverages of BAFS and BTSG are likely to rise over the next three years due to large investment plans. BTSG is also involved in the media, property and service businesses, which leaves it exposed to higher business risk than BAFS and GPSC, As a result, BTSG's rating is lower than that of the other two companies.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Uplift volume growth of 1.5%-2.0%% in 2017 and about 3.0% a year in 2018-2019;
- Oil pipeline project in northern Thailand to complete and start generating revenue in 2019;
- A stable EBITDAR margin of about 58% in 2017-2019;
- Capex of about THB3.0 billion in 2017, THB5.0 billion in 2018, and THB1.5 billion-1.6 billion in 2019, including investments in the oil pipeline project.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- The Rating Outlook could be revised to Stable if the company's FFO net adjusted leverage remains below 2.0x on a sustained basis.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
-A deterioration in operating performance, delays in the start-up of its pipeline project or additional capex and high dividend payouts, which lead to an increase in FFO-adjusted net leverage to above 2.0x on a sustained basis.
LIQUIDITY
Strong Liquidity: BAFS's liquidity is healthy, supported by an adequate cash balance and a well-structured debt maturity profile. At end-September 2017, BAFS's readily available cash balance and current investment were THB2.2 billion, above its short-term interest-bearing debt of THB485 million. BAFS's liquidity is also supported by the undrawn committed facility of THB6.5 billion at end-September 2017 and its strong cash-flow generation.