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Research Update: Australian Postal Corp. Outlook Revised To Stable On Strong Parcel Earnings; 'A+/A-1' Ratings Affirmed

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Research Update: Australian Postal Corp. Outlook Revised To Stable On Strong Parcel Earnings; 'A+/A-1' Ratings Affirmed

Rating Action Overview

  • Sustained growth in Australian Postal Corp.'s parcel business continues to offset losses in its mail business, lifting the group's earnings and strengthening its credit metrics.
  • In our view, Australia Post continues to benefit from the surge in e-commerce activity and structural changes that are likely to underpin longer-term growth in the parcel business. This growth should support capital investment initiatives into the group's processing and distribution capabilities to accommodate parcel processing volumes.
  • On Nov. 30, 2021, S&P Global Ratings revised its outlook on Australia Post to stable from negative. We affirmed the 'A+' long-term issuer credit rating and 'A-1' short-term issuer credit rating on the group. We also affirmed our 'A+' issue credit rating on the issuer's debt.
  • The stable outlook reflects our view that improved profitability in its parcel business should help Australia Post offset mail losses and fund its capital investment program while sustaining adjusted debt to EBITDA comfortably below 2.7x.

Rating Action Rationale

The risk of Australia Post's leverage remaining above our expectations for the 'A+' rating has abated. The outlook revision reflects our expectation that growth in parcel earnings and operating cash flow will offset mail losses and help fund the group's capital investment program. The surge in e-commerce activity during the pandemic triggered a step change in e-commerce penetration rates that we expect to persist in a post-pandemic environment. The associated earnings uplift allowed the group to reduce debt to EBITDA to 1.9x in 2021, well below the 2.5x reported in 2020.

Continued growth in parcel earnings should offset mail losses and fund ongoing capital investment in parcels network infrastructure. Parcel and services earnings grew by 31% in fiscal 2020 before moderating to about 3% in fiscal 2021. Although we expect some volatility in parcel volumes as economies reopen, parcel earnings growth should continue to offset mail losses and help fund capital investment in its parcels network infrastructure. We also note that although losses in the mail business moderated in fiscal 2021, this was largely due to regulatory relief measures, and we expect the ongoing structural erosion of mail volumes to continue.

Australia Post's competitiveness relies on its ability to manage its labor costs, productivity, and flexibility. Australia Post remains one of the country's largest employers with a workforce of about 35,000, and operates within a complex industrial framework. During July 2021, the group secured a new Enterprise Bargaining Agreement (EBA) for its award level employees. The EBA delivers a guaranteed 9% pay rise over the next three years, while maintaining key existing terms and conditions of employment. In our view, this provides increased certainty around employee expenses and flexibility over management of its extended workforce.

Australia Post is likely to rely on further regulatory relief to mitigate ongoing structural declining mail volumes . Australia Post received temporary regulatory relief until June 30, 2021 to manage the challenges of COVID-19, including a move to alternate day mail delivery. Australia Post will return to everyday mail delivery sometime during fiscal 2022, which will increase the group's operating costs. Increased automation across its processing hubs and flexibility across its extended workforce (employees, contractors, and casuals) should help to partially offset these increased overheads. However, we expect further regulatory relief will be needed over time to mitigate the ongoing impact of structurally declining mail volumes on the group's earnings and cash flow.

We expect growing parcel operating cash flow to fund capital investments required to expand its parcels processing and distribution network. Australia Post has committed to an additional A$400 million in new parcel facilities, fleet and technology by mid-2022 to support increasing parcel volumes. We also expect capital expenditure (capex) to remain elevated over our forecast period as the group responds to longer-term structural changes in e-commerce and online shopping. This investment should help to reduce the elevated cost base of the parcel operations in fiscal 2022, which arose from temporary measures employed to accommodate the unexpected surge in parcel demand. Australia Post's ability to internally fund most of this capital investment from operating cash flow will be key to maintaining credit quality.

We do not anticipate that the group's adoption of lease accounting standard AASB 16 will affect its creditworthiness. Australia Post's adoption of accounting standard AASB 16 requires off-balance-sheet lease obligations to be capitalized and brought on balance sheet. The group's lease liabilities relate to property leases (commercial buildings, industrial sites, retail stores and parcel lockers) and other assets, including dedicated freighters network, vehicle fleet and other equipment. This accounting change will increase its operating lease-adjusted debt and result in an increase in the group's adjusted debt-to-EBITDA ratio by about 0.2x. Despite the notional increase, our view of the group's underlying creditworthiness remains unchanged.

Outlook

The stable outlook reflects our expectation that Australia Post will continue to maintain its strong position in the parcels and non-letters markets in Australia. Improving parcel-processing efficiencies and cost-control measures should offset mail losses and enable the group to execute its planned capital investments such that adjusted debt to EBITDA is maintained comfortably below 2.7x.

The stable outlook also incorporates our expectation that Australia Post's government owner will provide regulatory relief or financial support over time to mitigate ongoing structural challenges in the mail business. We also expect the group to continue its prudent approach to shareholder returns during periods when financial headroom is limited within the current rating.

The ratings also reflect our expectation of a very high likelihood of extraordinary support from its government owner in times of financial stress.

Downside scenario

Negative ratings pressure could occur from further material deterioration in mail volumes or an increase in the group's financial risk appetite, such that adjusted debt to EBITDA is sustained above 2.7x. A downgrade could also occur from a material erosion in the competitive position and profitability of the group's parcel or retail businesses, even if the group maintains debt to EBITDA below 2.7x.

Pressure on the ratings may also arise if our assessment of the likely level of extraordinary support from the Australian government weakens. This could include a scenario where the government flagged its intention to sell down its ownership in the group.

Upside scenario

We could consider an upgrade if Australia Post's planned capital investments and other operational initiatives deliver meaningful earnings growth and improved profitability that, together with a more conservative financial policy framework, allow adjusted debt to EBITDA to be sustained below 2.2x. Upward rating momentum would also likely rely on ongoing regulatory support to mitigate losses in the mail business, and maintenance of the group's strong market position in the parcels business.

Company Description

Australia Post is a fully owned government postal and parcel carrier operating under the Australian Postal Corporation Act 1989 (APC Act). The group provides collection, processing, and distribution services of mail and parcel and express products. It also provides identity, retail merchandise, agency, and other services.

The Australia Post network encompasses more than 4,300 post offices, providing essential services to consumers in communities across Australia. In fiscal 2021, Australia Post generated revenues of A$8.3 billion and S&P Global Ratings-adjusted EBITDA of A$674 million.

Our Base-Case Scenario

Assumptions:
  • Australian real GDP to grow by 3.3% in 2022 and 2.8% in 2023 and Australia consumer price index (CPI) growth of 2.6% in 2022 and 2.1% in 2022. Stable economic growth should support consumer consumption and consequently e-commerce activity;
  • Modest revenue growth of 3%-4% in fiscal 2022, supported by growth in the parcel business offset by contraction in the letter business. Revenue growth will normalize at 2.5%-3.5% from fiscal 2023 as lockdown restrictions ease and economic activity recovers;
  • EBITDA margins to contract marginally in 2022 to 7.5%-8.0%, compared to 8.2% in 2021, attributed to commencement of the new EBA and reinstatement of service standards to pre-relief levels;
  • Capex of A$450 million to A$500 million in fiscal 2022, to support new parcel facilities, fleet- and technology-related investments;
  • Dividend payouts of about 65% of net profit after tax; and
  • No acquisitions or divestments during the next two years.

Based on these assumptions, we forecast the following adjusted credit measures:

  • Adjusted debt to EBITDA ratio of about 2.0x-2.5x in fiscals 2022 and 2023; and
  • Funds from operations (FFO) to debt of about 35% to 45% in fiscals 2022 and 2023.

Liquidity

The short-term rating on Australia Post is 'A-1', reflecting the long-term issuer credit rating and our assessment of its liquidity as strong. We expect the group's sources of liquidity to exceed its uses by more than 1.5x over the next 12 months, and by more than 1.0x over the next 24 months.

In our view, Australia Post has solid relationships with banks and a high standing in credit markets derived from the group's government ownership. In addition, we believe the group can absorb high-impact, low probability events without the need for refinancing. Its debt facilities have no financial covenants. We also note that its debt features a change-of-control clause, which we believe supports the group's access to funding.

Our key assumptions for the group's sources and uses of liquidity over the next 12 months from June 30, 2021 are as follows:

Principal Liquidity Sources:

  • A$450 million of undrawn committed facilities;
  • Available cash of about A$653 million; and
  • Cash FFO of about A$400 million-A$450 million.

Principal Liquidity Uses:

  • Capex of about A$450 million-A$500 million;
  • Debt maturities of A$100 million within the next 12 months; and
  • Distributions based on a dividend policy of 65% of net profit after tax.

Government Influence

We expect Australia Post to benefit from a very high likelihood of extraordinary support from the Australian government in times of financial stress. This is based on our assessment of Australia Post's:

  • Very important role in the national economy, due to the group's importance as Australia's sole public postal operator. The group provides collection, processing, distribution of letters and associated services, parcels, logistics, and express mail, as well as retail and agency services for financial transactions through an extensive network in regional and remote areas. Standard mail pricing is regulated by the Australian Competition and Consumer Commission, and the group has extensive community service obligations in the provision of postal services across metropolitan, regional, and rural Australia; and
  • Very strong link with the Australian government, which owns Australia Post and maintains an extensive governance framework. Moreover, the relationship has extensive legislative backing, we believe that privatization is unlikely in the medium term, and there is broad bipartisan political and community support for the current arrangements.

Under the APC Act, Australia Post is a commercially run business that provides essential public service on behalf of the Australian government.

We note, all else being equal, the rating on Australia Post would only be affected if the Commonwealth were downgraded to 'AA-'.

Issue Ratings - Subordination Risk Analysis

Capital structure

As of June 30, 2021, Australia Post's capital structure consists of senior unsecured debt issued at the parent level.

These include:

  • Undrawn revolving facilities of A$450 million,
  • A A$100 million five-year floating rate note maturing in 2021,
  • A A$175 million 10-year fixed coupon bond maturing in 2023, and
  • A A$180 million 10-year fixed coupon bond maturing in 2026.

The group has a weighted-average debt maturity of about 3.2 years on its outstanding bonds.

Analytical conclusions

We rate Australia Post's debt at 'A+', the same as the issuer credit rating, given that no significant elements of subordination risk are present in the capital structure.

Ratings Score Snapshot

Issuer Credit Rating

A+/Stable/A-1

Business risk: Satisfactory

  • Country risk: Very low
  • Industry risk: Low
  • Competitive position: Satisfactory

Financial risk: Intermediate

  • Cash flow/Leverage: Intermediate

Anchor: bbb-

Modifiers

  • Diversification/Portfolio effect: Neutral
  • Capital structure: Neutral
  • Financial policy: Neutral
  • Liquidity: Strong
  • Management and governance: Satisfactory
  • Comparable rating analysis: Positive (+1 notch)

Stand-alone credit profile: bbb

  • Related government rating: AAA
  • Likelihood of government support: Very high (+4 notches from SACP)

Related Criteria

Ratings List

Ratings Affirmed

Australian Postal Corp.

Senior Unsecured A+
Ratings Affirmed; CreditWatch/Outlook Action
To From

Australian Postal Corp.

Issuer Credit Rating A+/Stable/A-1 A+/Negative/A-1

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Aldrin Ang, CFA, Melbourne + 61396312006;
aldrin.ang@spglobal.com
Secondary Contact:Paul R Draffin, Melbourne + 61 3 9631 2122;
paul.draffin@spglobal.com

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