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Fitch Downgrades JWD InfoLogistics to ‘BBB(tha)’; Outlook Stable

          Fitch Ratings - Bangkok - 23 July 2019:
          Fitch Ratings (Thailand) Limited has downgraded JWD InfoLogistics Public Company Limited's (JWD) National Long-Term Rating to 'BBB(tha)' from 'BBB+(tha)' and downgraded its National Short-Term Rating to 'F3(tha)' from 'F2(tha)'. The Outlook is Stable.
          The downgrade reflects Fitch's view that JWD will sustain its high funds flow from operations (FFO) adjusted net leverage over the medium term. Leverage was 4.3x at end-2018, due to high capex and acquisitions of around THB1 billion. We expect a similar amount of capex and acquisitions in 2019, but cash flows from these investments will only improve gradually over a longer period, keeping leverage higher than 3.0x in the next three years.
          KEY RATING DRIVERS
          High Leverage Driven by Investments: JWD's capex and investments will remain high in 2019 at about THB1 billion, similar to 2018, mainly due to expansion of its cold-storage capacity, and its entry into Vietnam via the acquisition of a 24% stake in Transimex Corporation, one of the top-five logistics service operators in the country. Fitch views this acquisition as aggressive compared with investments JWD made in the last few years, because of its larger size and JWD's minority stake, which gives it limited control over Transimex's cash flows. We do not expect material dividends to be paid by Transimex over the next three years as it plans significant investments to keep up with the growth in Vietnam's logistics sector.
          Strong Business Operation: JWD's revenue is likely to rise at 15%-17% a year in 2019-2020, mainly driven by full-year consolidation in 2019 of the food-service business acquired last year, new projects in food services starting in 2020, and other new businesses, such as self-storage and heavy-machinery moving services. Its existing business should continue growing at 5%-8% a year, mainly driven by cold storage and transportation services. JWD's EBITDAR margin is, nonetheless, likely to decrease to 26%-27% over the medium term from 34%-35% in 2016-2017 (2018: 28.4%) because the acquired food service business' EBITDA margins are lower than its logistics business due to lower investment needs, and should remain around 4%-5% over the next two to three years.
          Well-Diversified Customers: JWD's customers come from many industries as its services cover various types of products, ranging from general goods, dangerous goods and automobiles to frozen and refrigerated food products. Besides warehousing and transportation, JWD provides general services for corporates and individuals, including records and information management, moving services and self-storage. Besides Thailand, JWD has also expanded its business into Myanmar, Laos, Cambodia and Indonesia over the past few years.
          Moderate Competitive Advantage: JWD is the sole concessionaire that provides warehousing and handling of dangerous goods shipped to and from the Laem Chabang Port in Thailand. Furthermore there are only a small number of dominant players in JWD's other logistics segments, each of whom have a fair level of service differentiation in terms of catchment area and specialisation. We therefore believe JWD benefits from moderate entry barriers, given the capital intensity, expertise and track record required. JWD is one of the top-three warehouse and yard operators in terms of area in the Laem Chabang Port, which handled more than 80% of shipments to and from Thailand in 2018.
          Small Operating Scale: JWD provides third-party logistics services to large corporates, which outsource some logistics functions from their in-house units, and to small-to-medium manufacturers. This business has a small operating scale, constrained by the size of Laem Chabang Port, and is therefore vulnerable to economic cycles. JWD's main business line of providing handling services and storage for imports and exports also exposes it to asset-concentration risk in the port area. Nonetheless, Fitch believes the company's overseas expansion and acquisition of the food-services business will support its business growth and increase diversification in the long term.
          DERIVATION SUMMARY
          JWD is one of the dominant players in full-service in-land logistic services in Thailand. Up to 25% 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), a leading community mall developer. SF has a stronger business profile in our view, given its stronger contractual revenue visibility than JWD and higher EBITDAR margins due to its ability to pass-on more operating costs to its tenants. In addition, SF is cushioned from the immediate impact of an economic downturn because of rental contracts with tenants. However SF's financial profile is weaker than JWD's, which counterbalances its business strengths, resulting in both companies being rated at the same level.
          Compared to IRPC Public Company Limited (IRPC, A(tha)/Stable, Standalone Credit profile of bbb+(tha)), the third-largest oil refiner and the third-largest petrochemicals producer in Thailand, JWD has significantly smaller operating scale and only slightly higher leverage over the medium term. Therefore, JWD is rated one notch lower than IRPC's standalone rating, despite the latter's higher earnings volatility.
          KEY ASSUMPTIONS
          Fitch's Key Assumptions Within Our Rating Case for the Issuer
          - 5%-8% growth a year in revenue from the existing business in 2019-2021;
          - THB700 million-800 million of revenue from the newly acquired food service subsidiary and other new businesses in 2019, the first full-year consolidation of the food service subsidiary, and THB1 billion-1.5 billon a year in 2020-2021.
          - A decrease in EBITDAR margin to 26%-27% in 2019-2021, mainly due to food service business with lower margin than the existing business;
          - Total capex and investment of about THB1 billion in 2019 and THB300 million-400 million a year in 2020-2021.

          RATING SENSITIVITIES
          Developments That May, Individually or Collectively, Lead to Positive Rating Action
          - A decrease in FFO- net-adjusted-leverage to below 3.0x on a sustained basis;
          Developments That May, Individually or Collectively, Lead to Negative Rating Action
          - Continued aggressive debt-funding investments or weaker cash flow generation leading to an increase in FFO net-adjusted leverage to above 5.0x on a sustained basis;

          LIQUIDITY AND DEBT STRUCTURE
          Adequate Liquidity: JWD's total debt at end-March 2019 was THB2.7 billion. About 49% will be due in the next 12 months. A short-term loan of THB510 million is to be refinanced by JWD's recently secured term loan of THB550 million. JWD's liquidity is supported by its cash balance and liquid investments of THB424.3 million at end-March 2019 and cash flow from operations. JWD also has access to bank loans and the capital markets. At end-March 2019, JWD had undrawn committed facilities of THB262 million and about THB625 million of uncommitted facilities available.

          SUMMARY OF FINANCIAL ADJUSTMENTS          
          - THB14.4 million deducted from selling, general and administrative expenses and re-classified as other non-operating expenses. The amount relates to one-off nonrecurring items, mainly losses on fair-value adjustment on investments and advisory fees.
          - THB13.9 million deducted from cost of sales (rental expenses), and reclassified as non-cash other expenses and excluded from the calculation of lease liabilities. The amount is the non-cash portion of rental expense derived from the straight-line rent accounting method.
          - Another THB16.5 million of rental expenses are excluded from the calculation of lease liabilities as they are short-term non-recurring rentals.
          Additional information is available on www.fitchratings.com