Fitch has upgraded SCGJWD Logistics Public Company Limited's (SCGJWD) National Long-Term Rating to 'BBB+(tha)' from 'BB+(tha) and its National Short-Term Rating to 'F2(tha)' from 'B(tha)'.

Fitch has also removed the Rating Watch Positive (RWP) from all ratings of SCGJWD. The Outlook on the Long-Term rating is Stable.

The upgrade follows the completion of the merger of the company, formerly known as JWD InfoLogistics Public Company Limited (JWD), with SCG Logistics Management Company Limited (SCGL), a subsidiary of The Siam Cement Public Company Limited (SCC, A+(tha)/Negative), by share swaps. At the same time, Fitch has affirmed the bond programme guaranteed by Credit Guarantee and Investment Facility (CGIF) at 'AAA(tha)'.

The rating upgrade reflects SCGJWD's improved credit profile following the merger, with enhanced service offerings and larger scale, as well as a stronger financial profile.

The rating also incorporates a one-notch uplift from its Standalone Credit Profile (SCP) of 'bbb(tha)' to reflect the likelihood of support from its stronger 42.9%-shareholder SCC. Although SCC does not have majority control over SCGJWD, SCC has operational incentive and a track record of providing support, including access to group funding arrangements.

Key Rating Drivers

Linkage with Key Shareholder: We assess that SCC has 'Medium' operational support incentive to support SCGJWD. SCGJWD is SCC's flagship for its logistics business, providing logistics and supply-chain services to the group and third parties. SCC has provided financial support to SCGJWD via intercompany loans and sharing the working capital facilities that banks provide to the group. Fitch believes that SCC is likely to continue to provide support, if needed.

Our 'Medium' assessment for operational support also reflects the common branding and SCC's influence as the largest shareholder with one of SCGJWD's co-CEOs seconded from SCC. However, the strategic incentive to support is viewed as 'Weak' due to SCGJWD's small size compared with SCC's key subsidiaries, leading to non-material earnings contribution and growth potential from SCJGWD in the medium term. The legal incentive is also 'Weak' given the absence of debt guarantees or cross-default clauses in the two entities' debt.

Stronger Business Profile: After the merger, SCGJWD will become the largest integrated logistics service provider in Southeast Asia, based on total revenue of more than THB29 billion (2022 pre-merger: THB5.9 billion), with enlarged geographical and service coverage. At the same time SCGJWD's EBITDAR is likely to more than double, although post-merger EBITDAR margin will be lower as SCGL has lower margins than JWD. Over the longer term, the merged entity should benefit from 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 goods as well as the cold chain business. Therefore, the two companies' businesses do not have significant overlap and are complementary. SCGJWD will have a wider geographical footprint following the merger, including in Laos, Myanmar, Southern China and the Philippines, in addition to JWD's existing presence in Vietnam, Cambodia and Indonesia.

Moderate Revenue Visibility: Around 40% of SCGJWD's revenue will be from logistics and supply-chain services to SCC, supporting stable demand as SCC group is a dominant player in various industries including cement, building materials, chemical and packaging. SCGJWD also benefits from moderate entry barriers in other logistics sub-segments, in light of the capital intensity and expertise required. SCGJWD is the sole concessionaire for warehousing and handling of dangerous goods at Laem Chabang Port, Thailand's largest deep-sea port. It is a top-three warehouse and yard operator by area at the port.

Improving Financial Profile: Fitch forecasts financial leverage of the merged entity to decrease significantly to around 4.5x, compared to JWD's pre-merger leverage of 6.0x. This is because SCGL had low leverage before the merger on account of its asset-light business model. However, we do not expect further deleveraging over the next two years as the company plans to step up capex for expansion and investments.

High Capex: The company will pursue a growth strategy over the next two to three years. The key strategic focus is to expand its cold storage capacity, add dry warehouses to meet rising demand, as well as M&A opportunities. However, increasing earnings should support the higher capex, which will allow for a stable leverage profile. We estimate SCGJWD's EBITDAR net leverage to remain at about 4x-4.5x in the next three years, while capex and investment for 2023 could increase to around THB3.2 billion from THB1.3 billion in 2022.

Stronger Organic Growth: We believe there is improved visibility for organic growth following the merger. We expect SCGJWD's wider platform of complementary services and larger customer base to create cross-selling opportunities. Although the current economic environment is challenging, we expect the company to generate at least modest growth with its diversified service offerings and strong customer relationships.

Derivation Summary

SCGJWD is one of Thailand's dominant full-service logistic service providers. A portion of its revenue has high visibility, supported by captive demand from SCC group, a government-granted concession for warehousing and goods-handling at the Laem Chabang Port, and medium-to-long-term contracts.

SCGJWD's 'bbb' SCP is weaker than the ratings of companies in the polymer and plastic-product business, including Polyplex (Thailand) Public Company Limited (PTL, A-(tha)/Stable), a leading manufacturer of polyethylene terephthalate film, and Eastern Polymer Group Public Company Limited (EPG, A-(tha)/Stable), a leading manufacturer of ethylene propylene diene monomer rubber insulation, polymer and plastic automotive parts and accessories, and disposable rigid-plastic packaging for food and beverage.

SCGJWD has a smaller operating scale and lower geographical diversification than PTL, which has operations across three key regions, including North America, Europe and Asia. SCGJWD has lower product and service diversification and fewer end-user segments than EPG, although its operating scale in terms of EBITDA is comparable. Both PTL and EPG also have lower financial leverage. Therefore, these lead to a lower SCP for SCGJWD than PTL's and EPG's ratings.

SCGJWD's business profile is stronger than that of HMC Polymers Company Limited (A-(tha)/Negative, SCP: bbb+(tha)), the largest polypropylene producer in Southeast Asia, due to SCGJWD's higher revenue visibility. HMC's earnings are volatile as it operates in the cyclical chemical business. However, HMC has lower financial leverage than SCGJWD, which offsets its weaker business profile. As a result, HMC's SCP above that of SCGJWD.

SCGJWD has a significantly smaller operating scale than IRPC Public Company Limited (IRPC, A-(tha)/Negative, Standalone Credit Profile: bbb(tha)), Thailand's third-largest oil refiner and petrochemicals producer. However, IRPC has higher earnings volatility due to its exposure to commodity price risk. IRPC is more adversely affected by the pandemic than SCGJWD, resulting in Fitch expecting higher financial leverage than for SCGJWD over the medium term. This compensates for IRPC's larger operating scale, resulting in SCGJWD's SCP being rated at the same level as that of IRPC.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Revenue of the combined entity of THB33.5 billion in 2023 and revenue growth of 8%-10% a year in 2024 and 2025.

EBITDAR margin at around 10% in 2023-2024

Capex of THB3.2 billion in 2023 and THB2.4 billion in 2024

Dividend payout ratio of 45%

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

EBITDAR net leverage decreases to below 4.0x for a sustained period.

Evidence of stronger ties with SCC

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDAR net leverage is above 5.0x for a sustained period.

Weakening ties with SCC

Guaranteed Bonds by CGIF

Factors that could, individually or collectively, lead to positive rating action/upgrade:

No positive action is expected as the 'AAA(tha)' rating is at the highest of the National Rating scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in CGIF's credit profile relative to Thailand's Long-Term Foreign-Currency Issuer Default Rating (BBB+/Stable).

Liquidity and Debt Structure

Manageable Liquidity: SCGJWD's debt was THB8.1 billion at end-March 2023, of which THB4.6 billion is due in the 12 months to end-March 2024. However, over 70% of maturing debt comprises working capital facilities, which we expect the company to roll over, as the debt is backed by a similar amount of net working capital assets and a healthy cash-conversion cycle. Its cash balance of THB1.4 billion and available uncommitted facilities of THB912 million are more than adequate to meet its contractual maturities of term loans amounting to THB550 million over the next 12 months.

After the merger, SCGJWD, as a flagship company of SCC, should have stronger ability to access domestic bank and capital markets, given the group's strong relationships locally.

Issuer Profile

SCGJWD is the largest integrated logistics service provider in Southeast Asia with expertise in industrial products, general goods, chemicals, automotive goods and refrigerated foods.

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.

Public Ratings with Credit Linkage to other ratings

SCGJWD's ratings incorporate a one-notch uplift from its SCP, reflecting our view that its main shareholder SCC, has 'Medium' operational incentives to support it.

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