KEY RATING DRIVERS
Higher Leverage, Temporary Breach: Fitch expects BAFS's FFO-adjusted net leverage to increase and temporarily remain above the tolerance level of 2.0x for its rating. This is due to the timing of high capex associated with its oil pipeline project to the northern part of Thailand. The project's investment cost is about THB7.5bn, which will be about 85% debt funded. However, Fitch expects BAFS's financial leverage to return to within 2.0x following the end of its high capex phase and contribution of a full-year of earnings from this new pipeline from 2020.
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 at Suvarnabhumi Airport, the country's largest international airport. It is also the major into-plane fuelling service provider at the airport, with 86%-87% market share by volume. The company faces limited competition, and benefits from high barriers to entry as concessions from the airport operator are required to operate the aviation fuel services at airports.
Continued Demand Growth: Fitch expects BAFS's uplift volume (the amount of fuel supplied to aircraft) to grow at 6.5%-7.0% in 2016, despite an expected decrease in the number of tourists from China in 4Q16 as a result of the government's policy to crack down on cheap tour packages from China since September 2016. Nonetheless, Fitch does not expect a significant decrease in the number of tourists from China to be sustained over the next year. In addition, BAFS's earnings depend on the number of flights, not the number of passengers, which provides the company with some buffer against a decrease in travellers to Thailand. Fitch expects BAFS's uplift volume to increase 4%-5% a year over the medium term, supported by recovery in the local and global economies, continued growth in Thai tourism as well as expansion at Suvarnabhumi Airport and Don Muang Airport.
Limited Exposure to Oil Prices: BAFS is insulated from the volatility of fuel prices as its revenues are 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.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Uplift volume growth of 6.5%-7.0% in 2016 and 4.0%-4.5% a year in 2017-2018;
- An increase in EBITDAR margin to about 58% in 2016-2018;
- Capex of THB1.8bn-2bn in 2016 and THB3bn-3.5bn a year in 2017-2018, including investment in the oil pipeline project.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action is unlikely in the next 12-18 months due to an expected increase in its financial leverage.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A delay in the start of operations of its oil pipeline project or cost overruns at the project as well as high dividend payouts, which lead to an increase in FFO-adjusted net leverage to above 2.0x on a sustained basis. Nonetheless, a temporary breach in the financial leverage guideline due to timing of high capex spending associated with the new pipeline project on its own should not lead to negative rating action.