FINNING INTERNATIONAL INC. Morningstar DBRS also confirmed the Company's Commercial Paper rating at R-2 (high). The trends on all credit ratings remain Stable.
KEY CREDIT RATING CONSIDERATIONS
The credit ratings confirmations reflect Finning's strong business risk profile as the largest exclusive dealer of
On
CREDIT RATING DRIVERS
Looking ahead, Morningstar DBRS may take a positive credit rating action if Finning maintains its commitments toward deleveraging, through a combination of earnings growth and moderate repayment of short-term debt over time, such that the Company sustains a gross debt-to-EBITDA of about 1.5x. A more permanent shift toward a stronger business risk profile, such as an increase in market position and/or a more favourable business mix, could also result in a positive credit rating action.
Conversely, and although not likely, given the strength of the current business risk profile, Morningstar DBRS may take a negative credit rating action if weaker-than-expected earnings and/or more aggressive financial policies result in weaker credit metrics on a continuous basis (e.g., gross debt-to-EBITDA increases to levels close to 3x).
EARNINGS OUTLOOK
Morningstar DBRS expects mid-single digit revenue growth in F2024, attributable to a stable performance in the product support segment (~56% of net revenue). The exceptional new equipment sales growth in the past three years has widened the installed base of the ageing fleet, and therefore contributes to maintained demand for parts and services. Furthermore, a growing proportion of equipment sales is supported by medium-term maintenance agreements. Revenue growth expectations are, however, subdued by expectations that the new equipment sales growth could cool off in 2024, following record deliveries in 2022 and 2023. The new equipment order book has been shrinking since the second quarter of F2023, in line with Morningstar DBRS' expectations. Morningstar DBRS anticipates EBITDA margins to remain relatively stable in F2024 as the Company benefits from a favourable sales mix and some efficiency gains from rationalized operations. In the medium term, Revenue and EBITDA are expected to grow at a steady pace on expectations of an increasingly favourable sales mix, supportive trends in mining and exploration of copper in
FINANCIAL OUTLOOK
While operating cash flows in F2023 were repressed by a significant increase in interest and income tax payments (which grew by 72% and 54%, respectively), Morningstar DBRS expects these outflows to flatten in F2024, and operational cash flows to trend in line with earnings. Morningstar DBRS also expects a pull-back in capital expenditure following lumpy investments toward rental fleet expansion in F2023. Changes in working capital (while difficult to predict because of the seasonal working capital nature of the business), are expected to provide an inflow driven by a reduction in inventory on hand because of the expected declines in booked orders and the fact that supply chain constraints have largely eased. A combination of steady operational cash flows and the unwinding of net working capital is expected to result in positive free cash flow, which has been a countercyclical feature for Finning. Morningstar DBRS expects the free cash flow to be deployed in part for shareholder returns through the share buyback program and in part to reduce short-term indebtedness by about
CREDIT Rating rationale
Finning's credit ratings are further supported by its market leadership in the heavy equipment dealership across its territories. The Company has a strong franchise as a leading distributer of CAT's industrial equipment. Market acceptance and competitiveness of CAT's products, particularly in construction, energy, and mining provide an anchor for Finning's operational growth and continuity. Market diversification and a solid distribution network support the growing proportion of recurring aftermarket services earnings. The credit ratings are constrained by financial leverage that has historically been relatively higher (above 2x gross debt-to-EBITDA). If Finning's management remains committed to a stronger balance sheet, the financial profile could improve above current levels in the medium term.
TRANSACTION-SPECIFIC DISCLOSURES
This disclosure includes any financial statement adjustments that deviate materially from those contained in the issuer's published financial statements.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030, (
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Finning, the relative weighting of the BRA factors was approximately equal.
(B) Weighting of FRA Factors
In the analysis of Finning, the relative weighting of the FRA factors was approximately equal.
Weighting of the BRA and the FRA
In the analysis of Finning, the FRA carries greater weight than the BRA.
Notes:
All figures are in Canadian dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodologies:
Global Methodology for Rating Companies in the Capital Goods Dealership Industry (
Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
This credit rating is endorsed by
The last credit rating action on this transaction took place on
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
For further information on Morningstar DBRS historical default rates published by the
Lead Analyst: Azande Ntanzi Ndlovu
Rating Committee Chair:
Initial Rating Date:
Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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