Fitch Revises JWD's Outlook to Negative, Affirms 'BBB+(tha)'

Wednesday 26 July 2017 10:19
Fitch Ratings (Thailand) Limited has revised the Outlook on JWD InfoLogistics Public Company Limited to Negative from Stable and has affirmed its National Long-Term Rating at 'BBB+(tha)' and its National Short-Term Rating at 'F2(tha)'.

The Negative Outlook reflects JWD's elevated leverage and weakened cash generation from a planned renovation of two general warehouses, additional dangerous goods revenue-sharing charges and a large drop in fishery products that affected its cold storage business. Fitch expects JWD to deleverage to a level commensurate with its current rating within the next 18-24 months, supported by a strong recovery in most of its core businesses and a cut in capex and investment plans.

KEY RATING DRIVERS

Weaker-than-Expected Cash Flow: Fitch expects JWD's EBITDAR and operating cash flow to be 24%-25% weaker over the medium term than it previously expected, although still better than in 2016 when most of the company's core businesses were hit by unexpected events, resulting in around a 24% decrease in EBITDAR. Most of the problems have now been resolved, with a recovery seen in 4Q16 and 1Q17. Fitch expects JWD's revenue to increase by 7%-9% a year in 2017-2018, with an EBITDAR margin of about 35%, below the previous forecast of 40%-42%.

Elevated Leverage; Metrics Under Pressure: Fitch expects JWD's FFO net-adjusted leverage to decrease to 3.0x-3.5x in 2017-2018 and below 3.0x in 2019, the level that is commensurate to its current rating (2016: 4.3x). JWD has revised its domestic capex plans and overseas investments due to its expected lower cash flow. Most of its overseas investment plan is uncommitted and flexible. Fitch estimates JWD's capex and investment spending at about THB1.2-1.3 billion over 2017-2019.

Well-Diversified Customers: JWD is a full-service inland logistics provider, arranging warehousing through transportation of goods across four main categories, including general goods, dangerous goods, automotive and frozen and refrigerated products. Each category contributed 15%-20% of JWD's total revenue in 2016. JWD also engages in moving services and record and information management.

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 and from Laem Chabang Port. The company's other logistics services are mostly in industries with a small number of dominant players, each of which normally has a fair level of differentiation in terms of catchment area, specialisation and expertise. Barriers to entry are moderate due to capital intensiveness, expertise and required record. JWD is one of the top-three warehouse and yard operators in the Laem Chabang Port area, where more than 80% of shipments to and from Thailand in 2016 were handled.

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-to-medium 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 will support business growth and increase diversification in the long term.

DERIVATION SUMMARY

JWD is one of Thailand's dominant full-service inland logistic service providers. A portion of its revenue has high visibility, supported by a concession and medium-to-long-term contracts. Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community-mall developer, is a close rating peer, as it has a similar operating scale. JWD is larger than SF in term of revenue and EBITDAR, but its EBITDAR margins are lower. SF has higher earnings visibility and more cushion against economic downturns. JWD has significantly more diversified customers by industry while SF's customers mainly include food retail stores, restaurants and entertainment services. JWD also has significantly lower financial leverage than SF. Therefore, JWD has a higher rating.

Compared to peers with a 'BBB+(tha)' rating, such as WHA Corporation Public Company Limited (BBB+(tha)/Negative) - a leading Thai modern warehouse for rent and industrial-estate developer - JWD has a smaller operating scale, reflected by its revenue and EBITDAR. JWD also has a slightly lower EBITDAR margin. Both face moderate competition in the industry where they operate, but JWD has much lower financial leverage and stronger interest coverage.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- 7%-9% growth a year in total revenue in 2017-2018 and 6%-7% in 2019 (1Q17: 4.9%)

- A stable EBITDAR margin in 2017-2019 at about 35% (1Q17: 32.7%)

- Total capex and investment of THB1.2-1.3 billion over 2017-2019

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action

- The Outlook could be revised back 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 its own level, leading to structural subordination at the parent level

- Aggressive debt-funding investments

- FFO net-adjusted leverage remaining above 3.5x at end-2017 and above 3.0x at end-2018

LIQUIDITY

Adequate Liquidity: JWD's total debt at end-March 2017 was THB2.1 billion. About 22.4% will be due in the next 12 months. JWD's liquidity is supported by its cash balance, liquid investment of THB464.6 million and strong cash flow from operation. JWD also has an access to bank loans and capital market and has prepared asset sales to a real estate investment trust if large funding is needed.