Fitch Ratings (Thailand) has downgraded Thailand-based integrated inland logistics operator JWD InfoLogistics Public Company Limited's National Long-Term Rating to 'BB+(tha)' from 'BBB-(tha)' and National Short-Term Rating to 'B(tha)' from 'F3(tha)'. At the same time, Fitch has affirmed the bond programme guaranteed by Credit Guarantee and Investment Facility (CGIF) at 'AAA(tha)'.
The Outlook on the National Long-Term Rating is Stable.
The downgrade reflects JWD's high financial leverage - measured by adjusted net debt/EBITDAR - and our expectation that it is likely to remain above 5.5x for at least the next 18-24 months. The high leverage reflects the company's continued large capex and investment plan. The Covid-19 pandemic has not affected JWD's earnings over the past two years; however, we expect free cash flow (FCF) to remain negative over the next few years on account of capex and investments.
KEY RATING DRIVERS
Negative FCF Delay Deleveraging: Fitch expects JWD's net adjusted debt/EBITDAR to remain high at about 6.0x in 2022 (1Q22: 6.6x), before decreasing to about 5.6x in 2023. The deleveraging is slower than our previous projection due to the company's upward revision of its capex and investment plan in 2022-2023. This is likely to cause JWD's FCF to remain negative for at least the next two-three years, after five consecutive years of negative FCF.
JWD's large capex and investment plan is the main driver of negative FCF, while commensurate returns on investment have lagged, causing financial leverage to increase in the past four consecutive years.
Capex for Capacity Expansion: JWD's capex in 2022 and 2023 of THB1.0 billion-1.2 billion a year is mainly for capacity expansion of cold storage and dry warehouses as well as increasing locations of self-storage services to meet rising demand. The investment plan of about THB400 million in 2022 is mainly for a joint venture with a leading property developer in Thailand to invest in built-to-suit cold storage and warehouses, and an additional stake in ESCO, a container handler at Laem Chabang Port, for immediate return in the form of a dividend and enhanced logistic opportunities.
Improving Operating Cash Flow: We expect JWD's EBITDA to further increase by about 16% in 2022 and about 20% in 2023, on increasing revenue from capacity expansion of dry warehouses and cold storage. The expansion was delayed in 2021 due to the Covid-19 pandemic. EBITDA growth in 2022 should be partly supported by the full-year consolidation of JWD's 83%-owned VNS Transport, an auto-parts logistics provider, and a 60%-owned logistics joint venture in Cambodia. Both operations have been consolidated in JWD since 2Q21.
JWD's EBITDA margin is likely to remain at 16% in 2022, given the low margin during the ramp-up of new cold storage, the remaining low margins on general-goods warehousing using third-party facilities, as well as a limited barge terminal business due to equipment damage. We expect the EBITDA margin to improve to 18% in 2023-2024, supported by the improving margin from new capacity and new businesses. Gross margins in new businesses, such as self-storage and food services, have improved significantly since 2H21.
Moderate Competitive Advantage: We believe JWD benefits from moderate entry barriers in light of the capital intensity and expertise required in its operations. JWD is the sole concessionaire that provides warehousing and handling of dangerous goods shipped to and from Laem Chabang Port, Thailand's largest deep-sea port. It is a top-three warehouse and yard operator by area at the port. In JWD's other logistic segments there are only a few dominant competitors, which have some service differentiation in terms of catchment area and specialisation.
Small Operating Scale: Fitch believes JWD's business and geographical expansion may support business growth and increase diversification in the long term. JWD has a small operating scale compared with higher-rated peers. It provides third-party logistics services to large corporates, which outsource some logistics from their in-house units, and to SME manufacturers. JWD's expansion in cold storage and other new businesses in recent years has eased its business and asset concentration at the Laem Chabang Port.
DERIVATION SUMMARY
JWD is a major full-service inland logistics provider in Thailand. Up to 15%-20% 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; Standalone Credit Profile (SCP): bbb-(tha)), a leading community-mall developer. SF has higher earnings visibility from long-term contracts with the tenants, but has been significantly affected by the pandemic due to large rental rebates given to tenants that faced difficulties. SF's recovery, nonetheless, has been fast, supported by its tenant mix, of which more than half are restaurants and supermarkets providing daily essentials.
In comparison, JWD's business integration in logistic services and well-diversified customer base have cushioned the downturn and compensated for its lower earnings visibility. The continued large capex and investment plan means JWD's financial leverage is likely to be close to SF over the medium term, while SF has additional financing flexibility by virtue of low net debt as a percentage of investment properties at market value. This results in rating JWD one notch below SF's SCP.
JWD's operating scale is significantly smaller than that of IRPC Public Company Limited (A-(tha)/Stable; SCP: bbb(tha)), Thailand's third-largest oil refiner and petrochemicals producer. IRPC has higher earnings volatility due to commodity-price risks. It was also more adversely affected by the pandemic. However, IRPC's financial leverage is lower than that of JWD. So IRPC's stronger business profile from its larger operating scale and lower financial profile means JWD is rated two notches lower than IRPC's SCP.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- About 15% revenue growth in 2022 from capacity expansion and first full-year consolidation of newly acquired subsidiaries in 2021, and about 10% revenue growth in 2023 -2024;
- EBITDA margin remaining at about 16% in 2022 before improving to about 18% in 2023-2024;
- Total capex and investment of about THB1.6 billion in 2022 and about THB1.3 billion a year in 2023-2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Adjusted net debt/EBITDAR decreases to below 5.0x for a sustained period.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Adjusted net debt/EBITDAR is above 6.0x for a sustained period.
Guaranteed Bonds by CGIF
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- No positive action is expected as the 'AAA(tha)' rating is at the highest of the National Rating scale.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Deterioration in CGIF's credit profile relative to Thailand's Long-Term Foreign Currency IDR.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: JWD's total debt was THB5.7 billion at end-March 2022, of which THB1.8 billion is due in the 12 months to end-March 2023, including debentures of THB600 million maturing in February 2023. JWD's liquidity is supported by its cash balance and liquid investments of THB1 billion as of end-March 2022 as well as cash flow from operations. JWD also has unencumbered properties - land and buildings with a book value of about THB1.3 billion - which we believe it can use to tap secured funding, if required.
The company has adequate access to domestic banks, with unused but uncommitted banking facilities of THB824 million at end-March 2022. It also has satisfactory access to domestic capital markets, as evidenced by its THB1.9 billion bond issuance in 2021 and THB500 million in 1Q22.
ISSUER PROFILE
JWD is a Thai integrated logistics operator for general goods, chemicals, automotive and refrigerated foods. JWD also has relocation services, document storage and self-storage services. JWD has expanded its business to Cambodia and Indonesia over the past three to four years.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The rating on JWD's guaranteed bond programme is driven solely by the unconditional and irrevocable guarantee provided by CGIF.
Additional information is available on www.fitchratings.com