SingPost's accelerated investment in FMH leaves little room for missteps: S&P

S&P Global Ratings on Tuesday (Nov 30) said that any operational weakness at Singapore Post (SingPost) S08 : S08 0%could constrain the issuer credit rating which is currently rated at BBB+ with a stable outlook.

This is because SingPost's leverage will temporarily jump on plans to accelerate its investment in Australian logistics services company Freight Management Holdings (FMH).

SingPost announced on Oct 8 that it will be increasing its stake in FMH from 28 per cent to 51 per cent, with revisions to an agreement made last year. It has brought forward its investment in FMH by about 1 to 2 years, and will be required to pay S$112 million in proceeds by the end of the year for its increased investment.

S&P said SingPost's creditworthiness will remain sensitive to any potential business underperformance. The deal will also constrain the postal services company's capacity to raise any additional debt at its subsidiaries. This includes any potential debt-raising at FMH, which the ratings agency understands is currently in a net-cash position.

SingPost's leverage will be at the outer edge of what the ratings agency expects for a BBB+ rating, based on the revised terms of the acquisition.

That being said, while rating headroom "remains tight", the ratings agency believes SingPost's management still holds multiple levers which could support its BBB+ ratings.

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S&P said: "We expect SingPost to be proactive in pursuing cash preservation measures to restore its debt-to-earnings before interest, taxes, depreciation, and amortisation (Ebitda) ratio to below 2.5 times. This includes potential disposal of the company's non-core assets, and taking a more prudent approach in spending and acquisitions."

SingPost's divestment of General Storage Company will generate about S$80 million of cash by the end of 2021, providing some relief against an already stretched balance sheet, S&P noted.

Accounting for the acquisition on a pro forma basis, the agency expects SingPost's adjusted debt-to-Ebitda ratio to be about 3 times in the financial year ending Mar 31, 2022, before recovering to about 2.5 times in FY2023.

The put options will have the potential to trigger annual cash calls between 2022 and 2026 at the option of FMH's existing shareholders, noted the agency.

The exercise price is based on FMH's future earnings performance, where S&P estimates that the aggregate value of the put options could result in S$137 million to S$375 million in future payment proceeds.

Noting that the first possible exercise date will be between June 2022 and June 2023, the ratings agency said that, if exercised, the transaction could incur an estimated cash call of S$100 million to S$120 million for an additional 23 per cent stake in FMH.

However, S&P believes that SingPost's S$465 million cash balance as of Sep 30, 2021 will be sufficient to fund the cash call.

S&P plans to fully consolidate FMH into SingPost's financials, which it estimates will add about S$40 million to S$50 million of Ebitda by FY2023. Forecasts put SingPost's Ebitda at S$180 million to S$185 million in FY2022, and S$250 million to S$275 million from 2023 to 2024.

READ MORE:

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