Bangkok--13 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 maintained Negative Outlook. Fitch has also affirmed BAFS's National Short-Term Rating at 'F1(tha)'.
The Negative Outlook reflects the potential construction and business risks associated with the company's oil pipeline project undertaken by subsidiary Fuel Pipeline Transportation Limited (FPT) and the expectation that financial leverage will increase temporarily during the construction phase. BAFS has not yet signed off-take agreements for the FPT project, but Fitch considers the off-take risk to be limited due to the healthy existing oil demand in the area served, fee competitiveness against alternative transportation as well as safety, social and environmental reasons. Fitch expects BAFS to deleverage after FPT's first full year of operation in 2020, but the pace of deleveraging could be delayed by cost overruns, construction delays, and/or failure to secure sufficient off-take demand.
KEY RATING DRIVERS
Increasing Financial Leverage: Fitch expects BAFS's FFO-adjusted net leverage to rise to 3.0x-3.5x over 2018-2019, due to the large capex plan for the FPT project, before declining to about 2.0x, the level commensurate with its current rating by 2021. The deleveraging should be supported by low capex after the completion of the FPT project and stable operating cash flow, including cash flow from continued growth in the refuelling business and additional cash flow from the FPT project. The first phase of the FPT project is due to start operation in 2Q19.
FPT Business Risks Manageable: The pipeline, which will run through the northern part of Thailand, faces project completion risk and off-take risk. Although BAFS has not yet secured any off-take agreements with the customers, Fitch believes the company's aim to gain 40% of the oil transportation market in northern Thailand within the first three years of operation is achievable. This pipeline project is the first in northern Thailand. Fitch expects the shift from the current mode of transporting oil, mainly by trucks, to be supported by fee competitiveness as well as safety, social and environmental reasons.
Moderate Uplift Volume Growth: Fitch expects BAFS's uplift volume (the amount of fuel supplied to aircraft) to increase by3.5%-4.0% a year over the medium term. An increase in the excise tax imposed on jet fuel for domestic routes since February 2017 dampened uplift volume growth in 2017 to 1.6% because several airlines revised their refuelling routes. The uplift volume growth has nonetheless recovered to 4.0%-4.5% in 2018. Fitch expects demand growth to remain supported by recovery in the local and global economies, continued growth in Thai tourism as well as expansion at the two largest international airports in Thailand, where BAFS operates.
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 and the major into-plane fuelling service provider with 88% market share at Suvarnabhumi Airport (SA), the country's largest international airport. It is also the sole operator for refuelling services at Don Muang Airport (DMK). 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 revenue is 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 that of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Rating Watch Negative), PTT group's flagship power company. GPSC's revenue is derived from contracted power and steam sales to customers with strong credit profiles. Both companies, therefore, have highly predictable and stable earnings. GPSC's financial leverage, excluding a recently announced acquisition, should remain below 2.5x over the medium term, while the financial leverage of BAFS is likely to rise significantly to above 3.0x as it invests in the FPT project over the next two years before decreasing to about 2.0x. Both are, therefore, rated at the same level but the rating on BAFS is on Negative Outlook while GPSC has been placed on Rating Watch Negative, pending greater clarity on the long-term funding and post-acquisition capital structure.
CP ALL Public Company Limited (CP ALL, A(tha)/Stable), the largest convenience store chain in Thailand, does not have earnings that are as highly predictable as BAFS. However, CP ALL has a very strong competitive position, with a market share that is significantly larger than that of its closest rival. Moreover, CP ALL sells daily essential goods, leading to stable revenue and margin. CP ALL has a significantly larger operating scale and EBITDA size than BAFS. CP ALL is on the de-leveraging path, but its financial leverage is likely to remain higher than BAFS's over the medium term. Therefore, BAFS is rated higher than CP ALL.
TICON Freehold and Leasehold Real Estate Investment Trust (TREIT, A(tha)/Stable), the largest industrial REIT in Thailand, has high earnings visibility, supported by contracts with customers. Unlike the concession-like business of BAFS, TREIT has to compete with other players in the market. TREIT has a similar EBITDA size to BAFS but a higher financial leverage over the medium term. BAFS is rated higher than TREIT.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Uplift volume growth of 4.0%-4.5%% in 2018 and 3.5%-4.0% a year in 2019-2020;
- First phase of oil pipeline project in northern Thailand to complete and start generating revenue in 2Q19;
- A stable EBITDAR margin of 57%-58% in 2018-2019 and increasing to 59% in 2020, the first full year of operation of the new pipeline;
- Capex of about THB4.5 billion in 2018, THB2.5 billion in 2019, and THB350 million in 2020, including investments in the oil pipeline project and to step up operations as the SA and DMK airports expand.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- The Rating Outlook could be revised to Stable if the company successfully de-leverages towards 2.0x FFO adjusted net leverage by 2021 after completion of the FPT project.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Deterioration in operating performance, delays in the start-up of its pipeline project or additional capex and high dividend payouts, which resulted in the company's failure to deleverage towards 2.0x FFO-adjusted net leverage by 2021.
Should the company be able to demonstrate its ability to secure contracts for or market share of oil transportation to the northern part of Thailand rapidly and have stable operations for the new pipeline, Fitch may consider raising the negative rating guideline on financial leverage to 2.5x.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: BAFS's liquidity is healthy, supported by an adequate cash balance and a well-structured debt maturity profile. At end-September 2018, BAFS's readily available cash balance and current investments were THB1.4 billion (excluding about THB619 million of bank deposit and government bonds that are collateral for a long-term loan), above its short-term interest-bearing debt of THB341 million. BAFS's liquidity is also supported by the undrawn committed facility of THB3.3 billion at end-September 2018 and its strong cash-flow generation.
Additional information is available on www.fitchratings.com