Fitch Ratings has revised the Outlook on
SF's senior unsecured rating and the ratings on its outstanding bonds have also been affirmed at 'A-'. A full list of rating actions is listed below.
The Outlook revision reflects the company's recovery in profitability and deleveraging capacity following its acquisition of
The rating affirmation reflects SF's strong business profile as
Key Rating Drivers
Deleveraging Capacity: We expects SF's leverage to remain below 2x net adjusted debt/EBITDAR in the medium term. Improved profitability after the KLN acquisition, lower capex and equity share placement proceeds of
Controlled Capex: We estimate capital intensity will be controlled at around 6%, compared with 8%-9% in 2020-2021, since its incremental investments to pursue growth opportunities and continuously improve operations should be lower than its enlarged revenue base. In addition, SF's proportion of committed capex is not high and can be flexibly reduced, depending on market conditions.
Improved Profitability: We think SF can sustain the progress it has made in improving profitability over the past year, despite a challenging economic environment. Profitability has risen yoy since 4Q21 to an EBITDA margin of around 6.9% in 1H22, from 5.6% in 2021, in spite of the impact of Covid-19 pandemic control measures in
Higher Operating Efficiency: The profitability of SF's newer businesses, apart from express delivery, should improve with greater economies of scale. Segments such as heavy load, and supply chain and international are at breakeven or have turned to net profit in 1H22, from a net loss in 1H21. Business diversification has improved; we estimate half of revenue will be from non-express delivery businesses in 2022, compared with less than 30% before 2020. The consolidation of KLN has boosted diversification, with synergies leading to incremental profit.
Better Pricing: We expect SF's traditional express delivery business to see stable-to-higher pricing ability after easing competitive pressure. Pricing for the
Premium Position Maintained: We expect SF to keep its position at the higher end of the market. Direct model operators, such as SF, tend to have a higher revenue share instead of volume, compared with partner-model companies, which focus on e-tailing deliveries that face constant price pressure from fierce competition. SF's ASP per parcel of around
Derivation Summary
SF has a strong business profile as the market leader in
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue growth of 31% in 2022 (based on yoy reported growth following partial year consolidation of KLN in 2021), before moderating to 5% by 2024
EBITDA margin of 7% in 2021, before improving to 8% by 2023-2024 (2021: 5.6%)
Capital intensity of 6% in 2021-2024 (2021: 9.3%)
Dividend payout maintained at 20% in 2021-2023, in line with historical level
Cash outflow of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
No positive rating action is envisaged until the company significantly diversifies its product and geographical markets without compromising its profit margin or financial profile
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained decline in EBITDA
Adjusted net debt/EBITDAR above 2.0x (2022 forecast: 1.7x) and/or FFO adjusted net leverage sustained above 2.3x (2022 forecast: 1.9x)
Persistent negative FCF, stemming from high capital intensity, which, for instance, is not sustainably covered by non-debt sources
Significant loss of express-delivery service market share or lower-than-industry average growth
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: SF has a strong balance sheet, with around
Issuer Profile
SF is a leading express delivery and integrated logistics service provider. It is the market leader in
Summary of Financial Adjustments
Fitch has chosen to use the multiple approach to capitalise leases for SF, assessing leverage on an adjusted basis. We think the multiple approach is more appropriate for express delivery companies like SF under Fitch's Generic Ratings Navigator as the decision to lease or buy key operating assets is a core financial decision among major players and adjusted metrics would allow for better comparability.
Fitch-defined lease expenses have been capitalised using a 6x multiple, representing Fitch's estimate of the useful economic life of the main assets.
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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