The downgrade is based on our expectation that the company's aggressive investment plan and sustained negative free cash flow (FCF), defined as cash flow from operations after capex and dividend, will make reducing its FFO (funds flow from operations) adjusted net leverage to below 5.0x challenging in the next 18-24 months. We now assess JWD's financial profile based on FFO lease adjusted metrics (capitalising leases using a multiple), which better reflects its leverage, given the high reliance on real-estate leases for its warehousing business, in line with our Corporate Rating Criteria.
KEY RATING DRIVERS
Sustained Negative FCF: Fitch expects JWD's FCF to remain negative for at least the next two years, after four consecutive years of negative FCF. JWD's negative FCF has been mainly driven by the company's large capex and investment plan, while commensurate returns on investment have lagged, resulting in stagnant EBITDA growth in the past several years. JWD plans to continue its significant capex of THB800 million-900 million a year in 2021-2022 as well as large investments totaling THB800 million-900 million in 2021.
High Financial Leverage: Fitch expects JWD's FFO adjusted net leverage to remain high at 5.5x-6.0x in 2021 (2020: 5.6x) before decreasing to around 5.0x in 2022. The high leverage is driven by JWD's continued large capex for expanding capacity and investments, which will be mainly financed by the company's internal cash flow and debt. Its large investments in minority stakes in certain sectors have exacerbated the rise in leverage because we expect dividend income from these investments to be limited in the medium term.
Capacity Expansion, Integration: JWD's capex is mainly to expand its cold-storage capacity as demand has increased significantly over the past few years. The company's capex in 2021 includes a joint venture with a canned food manufacturer, which will become the customer of its new cold-storage facility. The company expects to have additional capacity of about 20,000 square metres by 2022.
The 2021 investment plan is mainly for strategic purposes to increase integration and enhance logistics business opportunities. This includes the recently announced acquisition of an auto-parts logistics service provider for THB200 million. JWD's expansion in related businesses in recent years, such as the operation of the train container yard and barge terminal at Laem Chabang Port and providing customer-to-customer logistic services for temperature-controlled goods, should expand its service range and improve its competitive advantage over the medium to long term.
Improving Operating Cashflow: We expect JWD's EBITDA to rise to THB750 million-THB800 million in 2021, and THB950 million-THB1 billion in 2022, from THB632 million in 2020. This will mainly stem from increasing revenue from existing businesses and newly consolidated subsidiaries. Its EBITDA margin is likely to remain around 16%-17% over the medium term, lower than the 18%-20% in 2018-2019 due to the thinner margin of new businesses.
Its existing businesses' growth is supported by our expectations of strong recovery in the dangerous-goods and automotive businesses, and continued growth in the cold storage and general goods businesses. EBITDA growth will also be supported by JWD's 100% acquisition of VNS Transport in April 2021, the auto-parts logistics service provider, and the increased stake to 60% in a joint venture that provides logistics services, such as dry warehouse, cold storage and cross-border transportation, in Cambodia. The two companies' revenue will be consolidated from 2Q21.
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. There are only a few dominant competitors in JWD's other logistic segments, which 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, Thailand's largest deep-sea port.
Small Operating Scale: JWD has a small operating scale compared with higher-rated peers. It provides third-party logistics services to large corporates, which outsource some logistics functions from their in-house units to SME manufacturers. The company's expansion in its cold storage and other new businesses in recent years has eased its business and asset concentration at the Laem Chabang Port area. Fitch believes JWD's business and geographical expansion may support its business growth and increase diversification in the long term.
JWD is one of Thailand's major full-service inland logistics providers. 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), a leading community mall developer. SF has higher earnings visibility from long-term contracts with the tenants. However, SF has been significantly affected by the Covid-19 pandemic due to a large rental rebate given to tenants that faced difficulties. SF's recovery, nonetheless, has been quite fast, supported by its tenant mix, of which more than 50% are restaurants and supermarkets, which provide daily essentials.
In comparison, JWD's business integration in logistics services and well-diversified customer base have provided it a good cushion in the downturn and compensate for its lower earnings visibility. In terms of financial profile, JWD has lower financial leverage, while SF has a low ratio of net debt to investment properties and a portfolio of marketable properties. We believe JWD and SF have comparable business and financial profiles and, therefore, they are rated at the same level.
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 exposure to commodity price risk. IRPC is more adversely affected by the pandemic than JWD. IRPC's financial leverage is likely to decrease to a level similar to JWD's over the next 12-24 months. Therefore, with IRPC's stronger business profile from its significantly larger operating scale and comparable financial profile, JWD is rated one-notch lower than IRPC's Standalone Credit Profile.
Fitch's Key Assumptions Within our Rating Case for the Issuer Include:
- Revenue growth of 28%-29% in 2021 from continued improvement in existing businesses and consolidation of newly acquired subsidiaries, 18%-19% in 2022 and 10% in 2023
- EBITDA of THB750 million-THB800 million in 2021 and THB950 milion-THB1.0 billion in 2022
- EBITDA margin remaining at 16%-17% in 2021-2023
- Total capex and investment of about THB1.7 billion in 2021, capex of about THB900 million in 2022 and THB700 million-THB800 million in 2023. No additional investment is assumed in 2022 and 2023.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- FFO adjusted net leverage decreases and is sustained at below 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO adjusted net leverage sustained at above 5.0x.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: THB1.5 billion of JWD's debt is due by end-March 2022, including THB514 million of debentures due in November 2021. The company plans to refinance the maturing amounts with new bonds. JWD's liquidity is supported by its cash balance and liquid investments of THB1.3 billion at end-March 2021 as well as cash flow from operations.
The company has adequate access to domestic banks, with unused but uncommitted banking facilities of THB1.8 billion at end-March 2021, which we believe the company will be able to access. It also has satisfactory access to domestic capital markets, as evident in its THB700 million bond issuance in March 2021, under the bond programme guaranteed by CGIF that is rated 'AAA(tha)'. There is still THB1.2 billion of issuance available under the bond programme.
JWD is a Thailand-based integrated logistics operator for general goods, chemicals, automotive and refrigerated foods. JWD also engages in relocation services, document storage and self-storage services. JWD 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.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings