The Negative Outlook reflects the risk that BAFS's financial leverage - measured by EBITDA net leverage - would remain above 6x in 2023 and beyond if its fueling business does not recover as we expect.
Fitch expects BAFS's deleveraging to continue in 2023 and 2024, supported by a meaningful recovery in the aviation business after almost all countries have opened their borders. We expect BAFS's EBITDA net leverage to decrease to about 6.0x in 2023 and around 5.0x in 2024 (2022: 15.2x). However, air travel that is weaker than our expectations due to a slowdown in global growth and a slower-than-expected return of Chinese tourists to Thailand in 2023 pose downside risks to the recovery and deleveraging.
KEY RATING DRIVERS
Continued Deleveraging: Fitch expects BAFS's financial leverage to continue falling in 2023-2024 on improving operating cash flows from its aviation business. We expect BAFS's uplift volume - the amount of fuel supplied to aircraft - to recover to about 84% of pre-pandemic levels in 2023 and about 98% in 2024.
We have not made major changes to our 2023-2024 forecasts even though the uplift volume in 2022 was lower than previously expected due to China's pandemic lockdown in 2H22. BASF's uplift volume in 2022 was about 49% of pre-pandemic levels, below our forecast of about 55%. China's reopening since January 2023 should support a return of Chinese tourists in 2H23 and 2024.
Positive FCF Despite High Capex: Fitch expects BAFS to be able to generate positive free cash flow (FCF) in 2023 and 2024, as higher operating cash flow should be enough to cover increasing capex and dividend payments. BAFS's capex is likely to increase to around THB900 million-1 billion per annum in 2023 and 2024 from THB287 million in 2022, mainly to support the construction of a pipeline connection.
BAFS also plans to continue expanding its renewable energy business, although investments will be made with caution. We expect the company to carry out the plan beyond 2023. Still, large debt-funded investments, similar to those in 2021, will increase its leverage and delay its deleveraging pace materially.
Low Pipeline Contribution: Subsidiary Fuel Pipeline Transportation Company Limited's contribution will remain low in 2023 as its upper north pipeline system will take time to ramp up before it can make up for the loss of cash flow due to the transfer of the rights to manage another pipeline from Bangkok to Bang Pa-in to a subsidiary of Bangchak Corporation Public Company Limited. The upper north pipeline's fuel volume in 2022 was about 20% below budget, the company said. We expect the new pipeline connection to boost the fuel volume transported in the north pipeline system in 2025.
Dominant Position in Fueling Business: BAFS is the sole operator of the fuel depot and hydrant network at Suvarnabhumi Airport, Thailand's largest international airport, and a dominant into-plane fueling service provider. It is also the sole operator of refueling services at Don Muang Airport, an international airport serving low-cost carriers. Competition is limited, as concessions from the airport operator are required to provide aviation fuel services.
Limited Exposure to Oil Prices: BAFS is insulated from fuel-price volatility, as its revenue is derived solely from fueling service fees, with fuel being sold by oil companies to airlines. BAFS's major cost is its pre-agreed concession fee, resulting in stable profitability. BAFS faces low competition under its concession-based business model.
Stable Renewable Earnings: BAFS's expansion into renewable energy should support its business profile over the medium term via stable cash flows, subject to resource variability risk. The renewable projects benefit from power-purchase agreements (PPA) with an average tenor of around 20-25 years and strong counterparties - the Provincial Electricity Authority of Thailand and leading electric-power companies for the projects in Japan. Fitch expects the solar energy business to generate stable EBITDA (including dividend income) of about THB250 million a year for BAFS.
DERIVATION SUMMARY
BAFS's operating cash flow profile is close to that of Nava Nakorn Electricity Generating Company Limited (NNEG, A-(tha)/Stable), a small local power plant that contracts 70%-80% of revenue under a long-term take-or-pay PPA with state-owned Electricity Generating Authority of Thailand (BBB+/Stable).
Both companies face low competition risk. However, the pandemic's impact on the global aviation industry has temporarily affected BAFS's cash flow, while NNEG's operations have so far been more resilient. BAFS has a larger operating scale and greater diversification than NNEG, which has single-asset risk and no business diversification. BAFS's previously lower financial leverage is now much higher than NNEG's because of the pandemic's impact on its earnings from aviation fuel service and the large investments in the fuel transportation pipeline and renewable power assets during 2020-2024. The weaker financial profile results in Fitch rating BAFS one notch below NNEG.
BAFS's cash flow profile is also similar to that of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable, Standalone Credit Profile (SCP): a-(tha)). GPSC, like BAFS and NNEG, has highly predictable and stable earnings, supported by long-term take-or-pay PPAs. However, GPSC has a stronger business profile on superior asset diversification, revenue and earnings. GPSC's financial leverage is lower than that of BAFS, but GPSC has large capex and investment plans. This will result in similar financial leverage for both companies over the next two-to-three years. BAFS is therefore rated one notch below GPSC's SCP.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Uplift volume to recover to about 84% of pre-pandemic levels in 2023 and 98% in 2024 (2022: 49%);
- EBITDA margin to recover to around 52%-55% in 2023 and 2024 amid the recovery in the uplift volume (2022: 33.6%);
- Capex of about THB900 million in 2023 and THB1 billion in 2024, including capex for the pipeline connection project;
- A small interim dividend payment in 2023 and 80% dividend payout ratio from 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The Outlook could be revised to Stable if BAFS's EBITDA net leverage falls to about 6x by 2023.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- EBITDA net leverage remaining above 6x beyond 2023.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: BAFS's liquidity is healthy, supported by an adequate cash balance and a well-structured debt maturity profile. BAFS had a current portion of long-term loans of THB1.3 billion due over the next 12 months at end-2022, while its readily available cash balance and Fitch-defined liquid investments were THB2 billion. Liquidity is also supported by an undrawn committed facility of THB1.1 billion at end-2022. Available liquidity should be sufficient to finance the remaining capex for the north pipeline project.
ISSUER PROFILE
BAFS is the sole operator of the fuel depot and hydrant system and a major fueling service provider at Thailand's two largest airports. BAFS's 70%-owned subsidiary operates the pipeline from fuel depots in Bangkok to both airports and owns the only pipeline to the north of Thailand. The company also owns solar generation projects, with capacity of 36MW in Thailand and 13MW in Japan.
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