Logistics Services Provider Logwin Upgraded To 'BB+' On Prudent Financial Policy, Strong Cash Position; Outlook Stable

  • Logistics service provider Logwin continues to demonstrate a positive EBITDA trajectory and cash accumulation, while keeping its credit measures consistent with a 'BB+' rating.
  • We believe Logwin will maintain its prudent financial policy and generate excess cash flows, enhancing the company's resilience against potential adverse trading conditions.
  • We are therefore raising our long-term issuer credit rating on Logwin to 'BB+' from 'BB'.
  • The stable outlook reflects our view that Logwin will post low-single-digit revenue growth, stabilize its EBITDA margin at 4%-5%, and achieve weighted average adjusted funds from operations (FFO) to debt above 50%, while pursuing a disciplined dividend and investment policy and maintaining an ample cash balance.
FRANKFURT (S&P Global Ratings) April 23, 2019--S&P Global Ratings today took the rating actions listed above. The upgrade reflects Logwin's resilient operating performance translating into sustainable free cash flows, as well as its established and consistent track record of conservative balance-sheet management. We believe that Logwin will continue retaining a large part of excess cash flows on the balance sheet, further enhancing its financial flexibility to tackle any possible operational setbacks or potential future growth. As of Dec. 31, 2018, the company reported a cash position of about €156 million, which exceeded its adjusted debt--predominantly comprised of pension obligations and operating lease commitments--of about €115 million as of the same date.
Logwin achieved solid results in 2018, with reported EBITDA increasing to €58 million from €46 million in 2017--despite a difficult and competitive environment--and generation of free operating cash flow increasing to €37 million from €21 million. This was thanks to decent trade volumes in the Air and Ocean business segment, complemented by the stabilization of key sites and new business with existing customers in the Solutions business segment, further underpinned by continuous strict cost control and some positive non-recurring items. At the same time, Logwin's adjusted debt increased to €115 million at year-end 2018 from €105 million a year earlier, mainly on the back of higher operating lease commitments. Given that expanded EBITDA more than offset the higher adjusted debt, Logwin's adjusted FFO to debt improved to 67% in 2018 from 65% in 2017--a level commensurate with our minimal financial risk profile.
We expect Logwin to turn its improved EBITDA margins over the past few years into a lasting value of 4%-5% supported by the optimized and streamlined cost base. Accordingly, we think that, over the next two years, Logwin will maintain a weighted average adjusted FFO to debt above 50%, which is consistent with our threshold for the 'BB+' rating. We acknowledge the significant sensitivity of Logwin's credit measures to changes in pension obligations (tied to the benchmark interest rates and other actuarial assumptions) and operating lease commitments (linked to the contract portfolio and lease contract durations), which make up a material share of the company's total adjusted debt (close to 90% at year-end 2018). We believe that our approach to considering credit ratios on a five-year weighted average basis smooths out the impact of such potential fluctuations.
Logwin is a small-to-midsize logistics services provider operating in the highly fragmented and competitive underlying logistics industry, which in our view limits the company's bargaining power and constrains the business risk profile. Logwin is also exposed to cyclical end markets such as retail, automotive, and chemicals, which can undermine the company's earnings stability, in particular in the Solutions segment. We also see the scale of the company's operations as narrower than those of market leaders with a global reach. Logwin's profitability is constrained by its track record of relatively low (about 4%) and volatile EBIT margins, although partially offset by its asset-light business model, somewhat flexible cost base, and minimal capital expenditure needs.
We expect Logwin to maintain its strong commitment to high service quality and customer retention with customized service to key clients, as it has done in the past. In our view, cost optimization measures in the Solutions segment have strengthened its resiliency to volume decline to some extent. While we factor in the business improvement and the company's ability to maintain a similar customer base over the years, our overall business assessment remains constrained by Logwin's relatively small scale.
At 4.3%, Logwin's 2018 EBITA margin was lower than that of peers from a broader range of railroad, package express, and logistics industries. While the EBITA margin in the Air and Ocean division continues to be relatively resilient at 4%-6%, we expect that the EBITA margin in the Solutions division will remain thin at 1%-2% because of the high degree of service customization and large exposure to seasonality, which lead to network underutilization in some months.
The stable outlook reflects our view that Logwin will post low-single-digit revenue growth, stabilize its EBITDA margin at 4%-5%, and achieve weighted average adjusted FFO to debt above 50%, while pursuing a disciplined dividend and investment policy and maintaining an ample cash balance of at least €60 million-€70 million.
We would lower the rating if Logwin's earnings weakened, due to, for example, unexpected deterioration in operating conditions linked to the loss of one or more key customers or escalation of current trade disputes affecting global trade volumes, such that its competitive position and profitability notably eroded and the ratio of adjusted FFO to debt deteriorated to less than 50%, with limited prospects of improvement. We could also lower the rating if we noted any unexpected deviations from the company's current conservative financial policy that prevented credit measures remaining consistent with a rating or if Logwin's cash balances materially diminished.
We view an upgrade as unlikely in the next 12-24 months because of Logwin's limited scale, relatively low level of absolute EBITDA, and thin profit margins compared with the broader range of global peers in the railroad and package express industry. However, we could consider raising the rating if the company strengthened its business profile by significantly increasing its scale and scope of operations (organically and via profitability-enhancing complementary acquisitions) and improving profit margins while maintaining its adjusted FFO to debt above 50%.
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