SCT Logistics has delivered an improved 1H16 result in line with forecast, with the company progressing well on reducing its financial leverage. In addition, SCT Logistics is expected to benefit from a recent announcement that the government will fast track a major upgrade to the east west national rail network
Key points - 1H16 result
- Half year normalised EBITDA* of $21.2m is tracking in line with the FY16 forecast of $42.4m on a pro rata basis, consistent with the turnaround that was expected for the business post FY15 results
- SCT envisages the second half of the year will be relatively consistent to the first half – if this eventuates then full year EBITDA would be broadly consistent with the $42.4m forecast
- The net debt position has reduced by 15% from 30 June 2015 – from $149m to $127m. This is a function of the amortisation of secured equipment finance debt (flagged in new issue research) as well as the increase in cash (outlined below)
- Assuming EBITDA of $42.4m for the full year, we are seeing leverage (net debt / EBITDA) of 3.0x at the half year (a solid improvement from the 4.0x leverage at bond issue). With further debt reduction through secured equipment debt amortisation, leverage could fall below 3.0x by the end of the year
- Importantly, the amortisation of secured equipment finance over the half year has improved the relative position of the bond in the capital structure. Over time, we expect the bond’s relative position in the capital structure to improve with further amortisation of equipment finance debt. However, as secured debt reduces, the company’s flexibility under the bond documentation to raise additional secured finance will increase, subject to the negative pledge covenant which limits new secured debt to a maximum 2.0x EBITDA
- As flagged in the previous update on SCT, cash is up to $9.4m following the receipt of proceeds in the sale of a related party business Logicoil
The company’s financial performance is in line with forecasts (SCT has not previously published half year accounts, but is now required to do so under the bond) with good deleveraging of the business, summarised in the table below:
*Normalised EBITDA calculated as profit before tax ($4.04m), adding back line items finance costs, depreciation and amortisation expenses plus normalisation adjustment of $0.6m.
SCT Logistics has provided its half year accounts which are now available at its investor page (link here
). To obtain access to the webpage, bondholders need to email investors@sctlogistics.com.au, and upon verification they will receive a login ID and password.
Australian Rail Track Corporation to deliver significant rail upgrade
Last month, the Australian Rail Track Corporation (ARTC) announced that that it will fast track a major upgrade to the east west national rail network. The upgrade will involve 1,200 kilometres of rail replacement between Adelaide and Tarcoola, and will deliver a substantial boost to freight productivity in South Australia and the national freight network.
The upgrade will replace decades’ old rail with stronger steel, and the stronger tracks will enable axle weight to increase from 23 tonnes to 25 tonnes at 80kms per hour. This means that a heavier freight load will be able to be carried at faster track speeds, delivering a significant boost in productivity to the network and improved efficiency gains for SCT Logistics.
Following the improved 1H16 results and associated reduction in financial leverage in the business, SCT’s fixed and floating rate bonds show good relative value on a credit spread basis against a basket of similar bonds. It offers infrastructure-like exposure to the rail freight sector, and offers a current spread premium of around 230 basis points versus key competitor Asciano (with a shorter duration).
The bonds are currently offered at the following indicative yields to maturity:
- 2019 floating rate bond: 6.30%
- 2021 fixed rate bond: 7.00%
Please contact your FIIG representative for further details on the SCT Logistics bonds. Available to wholesale investors only with a minimum face value of AUD10,000.