Itch Ratings upgraded the national scale solvency and bond facility ratings of Grupo Empresas Navieras S.A. (GEN) to ‘A(cl)’ from ‘A-(cl)’. The Outlook was revised to Stable from Positive. At the same time, it ratified the classification of stock titles in ‘First Class Level 4(cl)’.
The upgrade of the ratings is based on positive results achieved in 2021 and 2022 across all businesses, as well as stable positive FFL generation sustained by a conservative investment plan. This meant that the company was able to consistently improve its credit metrics; in the last 12 months (UDM) to June 2022, gross debt reached 3.2 times (x) and net 2.7x. Fitch expects GEN to maintain a moderate debt reduction trend, in the absence of relevant investments or changes in its dividend distribution policy.
The ratings reflect GEN’s solid position in the shipbuilding, brokerage, logistics and port and airport concession operation markets in Chile and Latin America, and the stability of the generation of operating flows has allowed it to strengthen its credit profile. Said stability is supported by the growing diversification of its operations, with a greater focus on the shipping and logistics businesses, which are characterized by the predictability of their flows, supported by long-term contracts. In addition, the ratings consider GEN’s full control of its subsidiaries’ dividends and the exposure of its operations to international trade and product growth in Chile.
KEY CLASSIFICATION FACTORS
Positive Results in 2022: The company has improved its results in all its business lines, reaching revenues that exceed pre-pandemic levels; in 2021 it grew 29% and 42% in the first half of 2022, compared to the same period of the previous year. The higher revenues translated into a positive evolution of EBITDA, despite the slight reduction in its margin in the first half of 2022 (1H22) which reached 16.3% (1H21: 19.8%) mainly due to a greater participation of sale of Bunker (segment with higher volume, but lower margin), and to coal loads and minor chips registered in its subsidiary Portuaria Cabo Froward (Froward). Fitch projects moderate growth for the period 2023 to 2025, considering a greater economic contraction.
Positive Evolution of FCO: GEN has managed to diversify its operations towards businesses with lower volatility, such as shipowners, logistics and concessions, in which it has long-term contracts with its clients, which ensures greater stability in its flows. Fitch estimates that around 70% of the company’s consolidated EBITDA is associated with these long-term contracts. The agency projects conservative revenue growth of around 4% in 2023 and 2024, and calculates that the EBITDA margin will be close to 16% for the period 2022 to 2024, which would imply that the operating cash flow (FCO) grows at a range between USD100 million and USD135 million in 2024.
Indebtedness in Reduction: Fitch expects GEN to be able to maintain the debt reduction trend that it has shown in recent periods, and reach a gross debt level of less than 3.0x in the medium term, considering investments between USD30 million and USD40 million per year, and a conservative dividend distribution. The agency projects that GEN will maintain a positive FFL generation while strengthening its financial flexibility and reducing its debt, in the absence of investments much higher than those considered in the analysis. The growth in results in 1H22 and a low level of investments have allowed the company to reduce its gross debt to 3.2x in LTM from 4.9x in 2020.
Strong Logistics and Agency Business Growth: In 1H22, Agencias Universales S.A. (Agunsa) recorded revenue growth of 53% with an EBITDA margin of 9.9%. This rise was mainly due to growth in revenue from the logistics segment (37%), mainly derived from higher demand from companies in the mining industry. Added to this is the increase in agency revenues (81%) due to increased port activity, higher Bunker sales, the better performance of maritime representations and the closing of new contracts. Both business lines represent 33% of GEN’s total EBITDA.
GEN’s 23% growth in revenue from the port concessions segment (23%) in 1H22 is due to the positive performance of Puerto Manta, Talcahuano Terminal Portuario S.A. (TTP) and the Docking Front Concession No. 2 of the Port of Valparaíso, which has been partially offset by the reduction in loads of coal and chips transferred by Froward. In the airport segment, although GEN reduced the number of operations after stopping operations in the cities of Punta Arenas and La Serena, its post-pandemic activity has partially recovered; as of June 2022, its revenue grew 10%.
Solidity of the Shipbuilding Business: The structures of the time charter contracts that the subsidiary Compañía Marítima Chilena S.A. (CMC) owns with Empresa Nacional del Petróleo (ENAP) [AAA(cl)/Estable] for five tanker ships, with Copec S.A. (Copec) for one tanker, with AP Moller-Maersk for four 9,000 TEU (twenty-foot equivalent unit) ships, and with CMA CGM and ONE (Ocean Network Express) for two 3,100 TEU ships, ensuring solid and stable operational performance of this business. ENAP recently renewed four contracts until 2025. The foregoing, added to a good market position, the robust financial profile of these customers and the quality of the assets involved (in terms of size and average age), offset the risk of customer concentration in this business segment.
As of 1H22, GEN posted a 13% growth in revenues from this segment due to the operation of an additional ship in the tanker business at higher revenues due to fuel efficiency. As of the same date, it concentrated 43% of its EBITDA and 37% of its debt in the shipbuilding business, being the main contributor of EBITDA at a consolidated level (with EBITDA and EBITDA margin in the UDM as of June 2022 of USD69 million and 60, 5%, respectively). According to estimates by Fitch, the indebtedness of the shipbuilding business reached 2.5x in LTM as of 1H22, an indicator that is reduced in line with its debt schedule with periodic amortizations.
Stock Ranking: GEN’s stock ranking is based on its consolidated history of trading, its median market size (November 2022: USD185 million) and the adjusted spread of ownership, with a free float of 19%. . However, the classification is restricted to ‘First Class Level 4(cl)’ due to the scarce liquidity of its share titles given its reduced stock market presence.
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
–Reduction in GEN’s debt levels of around 2.5x (adjusted debt to EBITDA);
–Maintenance of long-term contracts for the shipbuilding business;
–greater diversification of clients and scale of operations;
–stability of its flows derived from the growth of Agunsa’s operations, as well as from the maintenance of the warehouse lease contracts.
Factors that could, individually or collectively, lead to a negative/downgrading action:
–investments or dividend distributions greater than those estimated financed with debt;
–early termination of ship rental contracts that impact the EBITDA of the shipbuilding business;
–deterioration in operating performance that implies a significant reduction in dividends paid to GEN;
–events that, separately or jointly, result in a consolidated gross indebtedness greater than 3.5x.
DERIVATION OF CLASSIFICATION
GEN is one of the most important players in the maritime industry at the national level and develops its operation in the shipowner, logistics, agency and concessions businesses. It has an income structure with a strong component of long-term contracts, which has helped to stabilize its FCO. Regarding business diversification and contract sales structure, GEN is well positioned compared to peers classified in the national scale categories of A-(cl) and A(cl). Fitch projects that debt, measured as adjusted debt to EBITDA, could reach 2.7x by the end of 2022 (2.2x net of cash); which would be in line with the median of the category of A(cl).
The key assumptions used by Fitch for the particular case of GEN include:
–income with annual growth of 32% in 2022 and around 3% to 4% for the period 2023 to 2025;
–Stable consolidated EBITDA margin, around 16% in the medium term;
–The contracts with ENAP (five tankers) and with AP Moller – Maersk (four 9,000 TEU vessels) are still in operation, in addition to the consolidation of a 3,100 TEU vessel;
–capital investment (capex; capital expenditure) at the consolidated level between USD30 million and USD40 million per year between 2022 and 2025;
–Dividend distribution: 30% profit for the year for the classification horizon.
LIQUIDITY AND DEBT STRUCTURE
As of 1H22, at a consolidated level, GEN maintained a positive liquidity position, with a level of cash and liquid securities of USD73 million, which represented 54% of short-term obligations (USD135 million). About 33% of said debt (USD45 million) is linked to the leased ships, and therefore with flows secured through long-term contracts, 52% (USD70 million) correspond mainly to revolving debt used by Agunsa, and USD17 million to GEN individual debt (USD9 correspond to bonds). In September 2022, Agunsa closed a loan for USD70 million with IFC (International Finance Corporation) for a seven-year term, intended to refinance its short-term debts.
The classifications also incorporate that GEN has, at a consolidated level and as of 1H22, 42% of its fixed assets free of liens, which cover 1.2x unsecured debt at book value, which, in a stress scenario, could restrict your financial flexibility. It should be noted that the book value of GEN’s fixed assets at a consolidated level covers 1.9x of its total financial debt. For its part, at an individual level, the company does not have guaranteed debt; This is concentrated in the CMC subsidiary, and in the subsidiaries that own the four 9,000 TEU ships.
GEN is one of the main national land, sea and air cargo logistics operators, in addition to maintaining significant geographic diversification of its operations. The holding develops a diversified portfolio of businesses, among which the shipbuilding business, the logistics business, maritime and air agency, port operation and airport concessions stand out.
The aforementioned classification(s) were(were) required and were assigned or followed up upon by the operator of the classified fund(s) or by a related third party. Any exceptions will be noted.
Risk category definitions and additional information available at www.fitchratings.com/site/chile.
Fitch Chile is a company that operates independently from issuers, investors and market agents in general, as well as from any government agency. Fitch Chile’s ratings constitute only opinions of credit quality and are not recommendations to buy or sell these instruments.
Summary of Adjustments to the Financial Statements
–Adjustments for leasing.
–Adjustment for derivatives on financial debt.
Fitch Chile’s Independence from issuers, investors and other relevant market participants.
The opinion of the rating entities does not constitute in any case a recommendation to buy, sell or hold a certain instrument. The analysis is not the result of an audit carried out on the issuer, but is based on public information submitted to the Commission for the Financial Market (CMF), to the stock exchanges and on that which the issuer voluntarily provided, not being the responsibility of the classifier verifying its authenticity.
CRITERIA APPLIED NATIONALLY
–Corporate Finance Rating Methodology (December 2, 2021);
–Share Classification Methodology in Chile (August 10, 2021);
–National Scale Rating Methodology (December 22, 2020).