S&P Global Ratings has warned that Transnet could lose its market share to competing logistics groups due to prevailing operational challenges.
The state-owned logistics company has a dominant position in rail freight and monopoly positions in regulated port and pipeline activities.
However, Transnet Freight Rail (TFR) – the group’s largest operating division – lost more than 15 million tons of freight volumes in the year ending March 31, 2022 after it declared a force majeure due to irregular locomotive acquisitions, maintenance problems and massive cable theft on its coal lines.
S&P yesterday said the operational challenges at TFR, compounded by the potential impact of rising inflation on operational costs, had led to expectations of its earnings margin to decline to 35-40 percent in 2022-2024.
This would translate to annual earnings before interest, taxes, depreciation, and amortisation (Ebitda) of R24 billion to R30bn.
S&P primary credit analyst, Munya Chawana, said persisting operational challenges would likely constrain Transnet’s recovery from the Covid-19 fallout.
Chawana said they had noted a downside risk to their business risk assessment due to some weakening in Transnet’s operating efficiency and the potential increase in the volatility of profitability due to escalating cable theft, vandalism, infrastructure sabotage, as well as infrastructure underinvestment and rehabilitation.
“Furthermore, Transnet’s inability to provide the rail volumes required by its customers, particularly in the bulk commodities space, raises the risk of customers turning to alternative transportation channels to maintain their export volumes,” Chawana said.
“While more expensive for bulk commodity producers, we have seen increased use of road freight and non-Transnet-controlled ports in neighbouring countries for bulk commodity exports, as companies wish to capitalise on supportive commodity prices.”
In spite of having a weaker operating efficiency, S&P lifted the credit watch on Transnet ratings on the back of improved liquidity.
This includes Transnet’s long-term local and foreign currency issuer ratings at BB-, the standalone rating at BB- and the National Scale Rating (NSR) at za.AA, but the outlook remained negative.
S&P said pressure on Transnet’s liquidity profile has eased following the recently completed five-year senior unsecured syndicated term loan facility of up to $1.5 billion (R25.1bn) and the bridge-to-bond facility of rand equivalent of up to $1bn.
It said these transactions should provide the company with ample liquidity to cover its capital expenditure and fiscal 2023 debt maturities of R23.8bn, including the upcoming $1bn TNUS22 bond maturity on July 26.
“However, in our view, Transnet’s liquidity headroom is likely to remain less than adequate over the next 12 months as the company continues to execute on its funding initiatives, and financial headroom remains tight,” S&P said.
“We expect that at end-2022, Transnet’s funds from operations will reach between R13.5bn and R19bn at end-2022, versus our previous expectation of R16bn to R20bn.”
In February, S&P gave Transnet a further three months to address its tight liquidity and acute refinancing risks through multiple debt-raising initiatives.
Transnet, is set to announce its annual results for the year ended March, 31 confirmed that it had secured sufficient funding to successfully redeem the $1bn bond and also support its liquidity requirements.
“Transnet notes S&P’s comments regarding the company’s operational challenges, and continues with its strategic initiatives to address these,” it said.
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