The downgrade reflects Fitch's expectation that BAFS's financial profile will be weaker than previously expected. We now expect BAFS's FFO adjusted net leverage to remain above 2.5x over the next three to four years. The higher leverage expectations are primarily driven by likely repeated cost over-runs in the north pipeline project and a likely delay in the completion of the second phase of this project being undertaken by its subsidiary, Fuel Pipeline Transportation Limited (FPT).
KEY RATING DRIVERS
Increasing Financial Leverage: Fitch expects BAFS's FFO adjusted net leverage to rise and remain between 3.5x and 4.5x in 2019-2020 (2018: 2.8x) as we foresee further cost over-runs in FPT's north pipeline project. The opening of the second phase is likely to be in mid-2020, a delay of about six months, postponing revenue and cash flows from the project. The first phase started operation in June 2019. We expect BAFS's financial leverage to improve from 2021 and range between 2.5x-3.5x after completion of the FPT project and assuming no other committed investment plans.
BAFS is bidding with a joint-venture partner to operate the aviation fuelling system in the new U-Tapao Airport, which will be the main airport in the Eastern Economic Corridor (EEC) in the eastern seaboard of Thailand. If it wins the contract, we estimate BAFS's financial leverage to be marginally higher and closer to 4.5x in 2019-2020 and about 3.5x in 2021. BAFS is also exploring investment opportunities outside Thailand and we treat any such investments as event risk.
Demand Risk for New Pipeline: FPT's new pipeline, the first in northern Thailand, carries off-take risk. The first phase of the project serves part of the fuel transportation needs of most major oil companies in Thailand, but no off-take agreement has been signed yet. Fitch considers the off-take risk to be mitigated by the existing oil demand in the area served and the cost of transport via pipelines being competitive compared to other modes, primarily trucks. The switch to pipelines is also likely to be supported by safety, social and environmental considerations, in our view.
Slower Volume Growth: Fitch expects BAFS's uplift volume (the amount of fuel supplied to aircraft) to increase by 3.0%-3.5% a year over the medium term, slower than 4.5% in 2018. The uplift volume growth in 2019 is likely to be about 2.5%, lower than the 4% previously expected, because of the global economic slowdown and appreciation of the Thai baht, which deterred some tourist arrivals. These factors are likely to continue in 2020. Uplift volume growth should be mainly supported by increasing long-haul flights by low-cost carriers at Don Muang Airport (DMK) while the uplift volume at Suvarnabhumi Airport (SA) is likely to be relatively flat in 2019-2020.
Strong Business Profile: 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 and the major into-plane fuelling service provider with 88% market share at SA, the country's largest international airport. It is also the sole operator for refuelling services at DMK. The company faces limited competition, and benefits from high barriers to entry as concessions from the airport operator are required to provide aviation fuel services at airports. FPT's north pipeline project should provide BAFS with business diversification and increase its operating scale over the next four to five years.
Limited Exposure to Oil Prices: BAFS is insulated from the volatility of fuel prices as its revenue is 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.
DERIVATION SUMMARY
BAFS's operating cash flow profile is close to that of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable), PTT group's flagship power company. GPSC's revenue is derived from contracted power and steam sales to customers with strong credit profiles. Both companies, therefore, have highly predictable and stable earnings. GPSC's higher financial leverage compared to BAFS is counteracted by its relatively stronger business profile with larger scale, which reflects its more diversified operations, especially after acquisition of power producer GLOW, and the contractual nature of its revenues. BAFS is therefore rated at the same level as GPSC's Standalone Credit Profile of 'a(tha)'. GPSC's rating incorporates a one-notch uplift to reflect its moderate linkage with PTT.
CP ALL Public Company Limited (CP ALL, A(tha)/Stable), the largest convenience-store chain in Thailand, does not have earnings that are as highly predictable as BAFS. However, CP ALL has a very strong competitive position, with a market share that is significantly larger than that of its closest rival. Moreover, CP ALL sells daily essential goods, leading to stable revenue and margin. CP ALL has a significantly larger operating scale and EBITDA than BAFS. CP ALL is on a deleveraging path, which will result in an expected financial profile that is similar to BAFS's over the medium term, and this explains their same rating level.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Uplift volume growth of about 2.5% in 2019 and 3.0%-3.5% a year in 2020-2021;
- The second phase of oil pipeline project in northern Thailand to be completed and start generating revenue in July 2020; revenue in the first full-year operation in 2021 to be THB1.3 billion to THB1.4 billion;
- A slight decrease in EBITDAR margin to about 56% in 2019-2020 due to the early stage of operation of the new pipeline and an increase in EBITDAR margin to 57%-58% in 2021, the first full year of operation of both phases of the new pipeline;
- Capex of about THB2.6 billion -2.7 billion in 2019, about THB2.1 billion-2.2 billion in 2020, and THB500 million-550 million in 2021, including investments in the oil pipeline project and to step up operations as DMK airport expands.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A decrease in FFO adjusted net leverage to below 2.5x for a sustained period while maintaining a strong business profile and achieving stability of FPT's north pipeline project
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- An increase in FFO adjusted net leverage to above 4.0x for a sustained period
- Significant increase in risks in FPT's north pipeline project resulting in a further cost over-runs, delay in commencement of the operation or significantly lower-than-expected cash flow from operations
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: BAFS's liquidity is healthy, supported by an adequate cash balance and a well-structured debt maturity profile. At end-June 2019, BAFS had unsecured short-term interest-bearing debt of THB466 million due over the next 12 months while its readily available cash balance and Fitch's defined liquid investment were THB1.4 billion (excluding THB579 million in bank deposits and government bonds, which are cash collateral for a secured long-term loan). BAFS's liquidity is also supported by an undrawn committed facility of THB1.5 billion at end-June 2019 and its strong cash-flow generation.
Additional information is available on www.fitchratings.com