Bangkok--24 Jul--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed JWD InfoLogistics Public Company Limited's National Long-Term Rating at 'BBB+(tha)'. The Outlook remains Negative. Simultaneously, the agency has affirmed JWD's National Short-Term Rating at 'F2(tha)'.
The Negative Outlook reflects our expectations that the company's financial leverage is likely to be high at above 3.0x over the next two to three years, driven by its aggressive investment in 2018.
KEY RATING DRIVERS
Leverage to Rise from Investment: Fitch expects JWD's FFO net adjusted leverage to be above 3.5x in 2018-2019 (end-2017: 2.0x) before gradually decreasing to below 3.0x by end-2021. JWD has a large capex and investment plan of about THB2 billion, including convertible loans to non-core businesses, for 2018. The plan is partly financed by net proceeds of about THB1 billion from the sale of its assets to a real estate investment trust (REIT) at end-2017.
These investments should allow JWD to expand its logistics business into Cambodia and Indonesia, and integrate food services into its cold-chain activities in addition to storage and transportation. However, the cash flow return from these investments is likely to be minimal over the next two to three years. JWD expects capex to decline to THB300 million to THB400 million a year in 2019-2020 and does not see any significant investment beyond that at the moment.
Recovery in Existing Business: JWD's performance in 2017 recovered as expected in terms of revenue and EBITDA margin. The warehouses for the JWD Chemical Supply Chain (JCS) project broke even in July 2017 and ran at almost full capacity in October 2017, while the Less-Than-Container-Load (LCL) Consolidation Hub project obtained its license and started operating in 3Q17. JWD's cold storage division had high stock levels at all locations with average occupancy rate of 76%-77% in 2H17, increasing from 52% in 2016. The company is installing racks in the JCS project and upgrading some dry warehouses to expand its cold storage capacity.
Well-Diversified Customers: JWD is a full-service in-land logistics provider, providing warehousing through transportation of goods, mainly in the four categories of general goods, dangerous goods, automotive, and frozen & refrigerated products. Each category contributes 10%-20% of JWD's total revenue. JWD is also involved in moving services and record & information management. Besides Thailand, JWD has gradually expanded into Myanmar, Laos, Cambodia and Indonesia over the past few years, mainly through joint ventures. However, Fitch expects EBITDA contribution from the overseas businesses to be minimal over the medium term.
Moderate Competitive Advantage: JWD is the sole concessionaire granted by the Port Authority of Thailand to provide warehousing and handling of dangerous goods shipped to/from the Laem Chabang Port. JWD's other logistics services are mostly to industrial customers with small number of dominant players, which are fairly differentiated in terms of catchment area, specialisation and expertise. The barriers to entry are moderate, given the capital intensiveness and required expertise and track record. JWD is one of the top-three warehouse and yard operators by area in the Laem Chabang Port, which handled more than 80% of shipments to/from Thailand in 2017.
Small Operating Scale: JWD provides third-party logistics services to large corporates that outsource some logistics functions from their in-house units and to small- and medium-sized manufacturers. This business has a small operating scale, constrained by the size of Laem Chabang Port, and is therefore vulnerable to economic cycles. JWD's main business of imports and exports also exposes it to asset-concentration risk in the port area. Nonetheless, Fitch believes the company's overseas expansion and integration into food services will support business growth and increase diversification in the long term.
DERIVATION SUMMARY
JWD is one of the dominant players in full-service in-land logistic services in Thailand. A significant portion of its revenue has high visibility, supported by a concession and medium- to long-term contracts. Its closest rating peer is Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community mall developer, as it has a similar operating scale. JWD is larger than SF in terms of revenue and EBITDAR size while its EBITDAR margins are lower. SF has higher earnings visibility and more cushion against an economic downturn than JWD. Nonetheless, JWD's customers are more diversified by industry than SF's, which are mostly food retail stores, restaurants and entertainment services. Both have large investment plans over the next one to two years and are likely to have increasing financial leverage. JWD's financial leverage is likely to still be lower than that of SF. Therefore, JWD has a higher rating.
Compared to IRPC Public Company Limited (IRPC, A-(tha)/Stable, standalone credit profile of BBB+(tha)), the third-largest oil refiner and the third-largest petrochemicals producer in Thailand, JWD has significantly smaller operating scale, revenue and EBITDAR. IRPC, however, faces commodity risk and has more earnings volatility than JWD. Both have similar levels of financial leverage. JWD is, therefore, rated at the same level as IRPC based on IRPC's standalone credit profile.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include:
- 10% growth in revenue from existing business in 2018 and 7%-9% a year in 2019-2020;
- THB300 million-THB350 million of revenue from newly acquired subsidiaries in 2018 and full-year revenue of THB600 million-THB700 million a year in 2019-2020.
- A decrease in EBITDAR margin to 27%-28% in 2018-2020, mainly due to new businesses with lower margins than the existing business;
- Total capex and investment of about THB2 billion, including the convertible loans, in 2018 and THB300 million-THB400 million a year in 2019-2020.
- Net proceeds of THB146 million from the sale of assets and investments to a REIT and the ex-owner respectively in 2018.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- The Outlook could be revised to Stable if the negative rating guidelines are not met within the next year.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
-A significant increase in debt at the JWD level without corresponding cash flow generation at that level, leading to structural subordination at the parent level;
-Aggressive debt-funded investments;
-FFO net-adjusted leverage remaining above 3.0x for a sustained period.
LIQUIDITY
Adequate Liquidity: JWD's total debt at end-March 2018 was THB2 billion. About 54% will be due in the next 12 months. JWD's liquidity is supported by its cash balance and liquid investments of THB804.7 million at end-March 2018 and cash flow from operation. JWD also has access to bank loans and the capital markets. The company sold some of its assets to a REIT and received net proceeds of about THB1 billion at end-2017.