The RWP reflects Fitch's view that JWD's credit profile should be stronger after the merger. The Rating Watch will be resolved once major conditions precedent to the transaction are met and more details on post-merger business strategy and financial projections are available.
After the merger, JWD will be an associate company of SCC with 42.9% indirect shareholding. Its financial statements will be consolidated with those of SCC, as the flagship company of the group providing logistics and supply-chain services to the group and third parties, in light of SCC's influence and control of the company.
Fitch will also review SCC's incentive to support the company, which could lead to an uplift on its standalone credit profile (SCP). This will be assessed under Fitch's Parent and Subsidiary Linkage Rating Criteria after details are available.
KEY RATING DRIVERS
Stronger Business Profile after Merger: After the merger, JWD will become the largest integrated logistics service provider in Southeast Asia, based on total revenues of more than THB25 billion (2021: THB5.1 billion). All assets and liabilities of SCGL will be transferred to JWD, which will change its name to SCGJWD Logistics Public Company Limited (SCGJWD). This should increase JWD's revenues and EBITDAR by about five times and 2.3 times, respectively. The merged entity should benefit from potential synergies and economies of scale and scope of business.
SCGL has expertise in transportation and distribution for the industrial segment with a large network, customer base and cargo. JWD specialises in warehouse management of dangerous goods and automotive as well as the cold chain business. We expect the merged entity's services to be more varied and integrated, given that the two companies' businesses do not overlap much and are complementary. JWD will have footprints in more countries after the merger, including Laos, Myanmar, southern China and the Philippines, in addition to its existing presence in Vietnam, Cambodia and Indonesia.
Improving Financial Profile: SCGL is in a net cash position as it operates with an asset-light model. Its EBITDAR net leverage should be 2.0x-3.0x, based on our preliminary estimate. The financial leverage of JWD (1H22: 6.5x) should therefore decrease significantly after the merger. Nonetheless, we will assess the sustainability of the company's financial leverage over the medium term to reflect the expansion and investment plan of the merged entity.
DERIVATION SUMMARY
JWD is a major full-service inland logistics provider in Thailand. 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; SCP: bbb-(tha)), a leading community-mall developer. SF has higher earnings visibility from long-term tenant contracts, but was significantly affected by the pandemic due to large rental rebates for tenants facing difficulties. SF has recovered quickly, supported by its tenant mix, more than half of which are restaurants and supermarkets providing daily essentials.
In comparison, JWD's business integration in logistic services and well-diversified customer base have cushioned the downturn and compensated for its lower earnings visibility. Its continued large capex and investment plan means JWD's financial leverage is likely to be close to SF's over the medium term, while SF has additional financing flexibility by virtue of low net debt as a percentage of investment properties at market value. This resulted in JWD being rated one notch below SF's SCP.
JWD's operating scale is significantly smaller than that of IRPC Public Company Limited (A-(tha)/Stable; SCP: bbb(tha)), Thailand's third-largest oil refiner and petrochemicals producer. IRPC has higher earnings volatility due to commodity-price risks, but its financial leverage is lower than that of JWD. IRPC's stronger business profile from its larger operating scale and lower financial profile means that JWD is rated two notches lower than IRPC's SCP.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer (Pre-Merger):
- About 15% revenue growth in 2022 from capacity expansion and first full-year consolidation of newly acquired subsidiaries in 2021, and about 10% revenue growth in 2023-2024;
- EBITDA margin remaining at about 16% in 2022 before improving to about 18% in 2023-2024;
- Total capex and investment of about THB1.6 billion in 2022 and about THB1.3 billion a year in 2023-2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The merger completes as planned with sustained EBITDAR net leverage below 6.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Fitch may remove JWD's ratings from Rating Watch Positive if the merger does not complete;
- EBITDAR net leverage is above 6.0x for a sustained period, if the merger fails.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: JWD's debt was THB6.0 billion at end-June 2022, of which THB2.0 billion is due in the 12 months to end-June 2023, including debentures of THB600 million maturing in February 2023. JWD's liquidity is supported by its cash balance and liquid investments of THB1 billion as of end-June 2022 as well as cash flow from operations. JWD also has unencumbered properties - land and buildings with a book value of about THB1 billion - which we believe it can use to tap secured funding, if required.
The company has adequate access to domestic banks, with unused but uncommitted banking facilities of THB544 million at end-June 2022. It also has satisfactory access to domestic capital markets, as evident from its THB1.9 billion bond issuance in 2021 and THB500 million in 1Q22.
ISSUER PROFILE
JWD is a Thailand-based integrated logistics operator for general goods, chemicals, automotive and refrigerated foods. It 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