The Negative Outlook reflects Fitch's expectation that JWD may find it difficult to lower funds flow from operations (FFO) net leverage to below 4.0x in the next two years on account of high new-capacity investments, even as revenue growth and operating cash flow remain muted amid the economic downturn. The rating could be downgraded if FFO net leverage is not on track to fall below 4.0x by end-2021.
KEY RATING DRIVERS
High Capex Drives Leverage: JWD's 2019 capex and investments totaled THB1.3 billion, mainly for robotic cold storage, which was completed in 4Q19, and an investment in a minority stake in Transimex Corporation - a logistics company in Vietnam. In particular we do not expect material dividends to be paid by Transimex over the next three years as it plans significant investments to keep up with the growth in Vietnam's logistics sector. JWD's 2020 committed capex of THB800 million is mainly for another robotic cold storage to support rising demand, as the first facility is almost fully utilised, and to build its first robotic document storage.
JWD is also investing in a build-to-suit warehouse for a corporate customer with a 15-year committed lease contract. We expect capex to moderate to around THB300 million-400 million in 2021, which could help JWD deleverage to around 4.0x. However the company's appetite for debt funded investments over and above our expectations - particularly those with long payback periods - poses a key risk to deleveraging.
Moderate Impact from Pandemic: We expect revenue and EBITDA to decrease by about 5% in 2020 and to recover in 2021, supported by new facilities coming on-stream. JWD's exposure to end-customers across diversified industries and its integrated logistics services mitigate the adverse impact from the coronavirus pandemic and related economic downturn. The utilisation of its general warehousing has increased from higher demand from one of its top-five customers as well as new customers recruited in late 2019. Revenue from the cold-chain business has also risen, as the pandemic-related lockdown has driven demand from food logistics services, especially those requiring temperature control. This is also supported by additional capacity from JWD's new robotic cold storage and cold-chain express delivery services. Fitch expects revenue from cold storage to increase by 19%-20% in 2020.
However, demand for JWD's automotive and dangerous goods storage has weakened significantly. Its automotive business is the most affected, in line with the global auto industry, and Fitch expects segment revenue to drop by about 30%. The interruption in global supply chains has also strained the warehousing of dangerous goods - mainly chemicals -particularly in early 2Q20.
Moderate Competitive Advantage: JWD is the sole concessionaire that provides warehousing and handling of dangerous goods shipped to and from Thailand's Laem Chabang Port. Furthermore, there are only a small number of dominant competitors in JWD's other logistic segments, each of whom have some service differentiation in terms of catchment area and specialisation. We believe JWD benefits from moderate entry barriers in light of the capital intensity and expertise required. It is a top-three warehouse and yard operator by area in Laem Chabang Port, which handled more than 80% of shipments to and from Thailand in 2019.
Small Operating Scale: JWD provides third-party logistics services to large corporates, which outsource some logistics functions from their in-house units and to SME manufacturers. The segment has a small operating scale, constrained by the size of Laem Chabang Port. JWD's main business line of providing handling services and storage for imports and exports also exposes it to asset-concentration risk in the port area. Nonetheless, Fitch believes the company's overseas expansion may support its business growth and increase diversification in the long term.
DERIVATION SUMMARY
JWD is one of Thailand's major full-service inland logistic service providers. Up to 25% 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)/Negative), a leading community mall developer. SF has a weaker business profile than JWD because, despite its contractual revenue visibility, it has a high fixed-cost structure that limits its ability to conserve cash flow during downturns. Consequently, SF's operating cash flow is likely to take longer to recover from the current downturn. JWD also has a stronger financial profile than SF and is therefore rated higher.
JWD has a significantly smaller operating scale than IRPC Public Company Limited (IRPC, A-(tha)/Stable, Standalone Credit Profile: bbb(tha)), Thailand's third-largest oil refiner and petrochemicals producer. However, IRPC has higher earnings volatility due to its exposure to commodity price risk. IRPC is more adversely affected by the pandemic than JWD, resulting in Fitch expecting higher financial leverage than for JWD over the medium term. This compensates for IRPC's larger operating scale, resulting in JWD being rated at the same level as IRPC's Standalone Credit Profile.
KEY ASSUMPTIONS
About 5% decrease in total revenue in 2020, before recovering with 11%-12% revenue growth in 2021 and 6%-7% growth in 2022EBITDA margin stable at about 18% in 2020, improving to 20%-21% in 2021-2022Total capex and investment of about THB800 million in 2020, THB300 million-400 million in 2020 and THB200 million-250 million in 2022
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook could be revised to Stable if FFO net leverage decreases to below 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
If the company is not on track to reduce FFO net adjusted leverage to below 4.0x by end-2021.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Manageable Refinancing Risk: THB892 million of JWD's debt is due by end-March 2021, including debentures of THB386 million due in November 2020. The company plans to refinance the matured amounts with new bond issuance. The THB88 million of short-term loans and current portion of long-term loans due in 2020 has been rescheduled to later years in accordance with government policies to support Thailand's SMEs.
JWD's liquidity is supported by its cash balance and liquid investments of THB539 million as at end-March 2020 as well as cash flow from operations. JWD also has unencumbered properties - land and buildings with a book value of about THB790 million - which we believe it can use to tap secured funding, if required. The company has adequate access to domestic banks, with unutilised but uncommitted banking facilities of THB1 billion at end-March 2020. It also has satisfactory access to domestic capital markets, as evidenced by its THB600 million bond issuance in February 2020, which it used to repay most of its short-term loans.
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.
Additional information is available on www.fitchratings.com