(Editor's Note: In the original version of this report published on Sept. 28, 2023, we cited the foreign currency rating instead of the local currency rating as the related government rating in the Rating Score Snapshot. A corrected version follows.)
Rating Action Overview
- An ongoing structural decline in New Zealand Post Ltd.'s (NZ Post) letter business, together with moderating parcel growth and significant cost inflation, will weigh on the group's earnings over the next 12-24 months.
- In our view, the group also has reduced financial flexibility following its divestment of retail bank Kiwi Group Holdings Ltd. (Kiwibank) in fiscal 2023 (ended June 30, 2023).
- We forecast NZ Post's S&P Global Ratings-adjusted debt-to-EBITDA ratio will remain elevated at about 3.3x in fiscal 2024, with improvement to less than 2.5x likely in fiscal 2025. The recovery is contingent upon parcel volume growth, price increases, and ongoing efficiency gains over the next 18 months.
- On Sept. 28, 2023, we revised our rating outlook on our long-term issuer credit rating on NZ Post to negative from stable. At the same time, we affirmed our 'A' long-term and 'A-1' short-term issuer credit ratings on the group.
- The negative outlook reflects our expectation that NZ Post's leverage will remain higher than our expectations for the rating, at least until the group's restructuring initiatives and capital investment program deliver earnings uplift and balance sheet relief.
Rating Action Rationale
NZ Post's credit metrics are likely to remain under pressure over the next 12-18 months. This is due to a challenging parcels market due to macroeconomic challenges and a consequent dip in e-commerce, together with structurally declining mail volumes and significant cost inflation. We forecast the group's adjusted debt-to-EBITDA ratio will remain elevated at about 3.3x in fiscal 2024, with a rebound to below 2.5x likely in fiscal 2025, if it can achieve material cost savings and efficiency gains.
NZ Post reported significantly weaker financial performance than we expected in fiscal 2023, with an adjusted debt-to-EBITDA ratio of 5.3x (including restructuring expenses of NZ$43 million), up from 2.3x in the prior year. The weaker credit metrics were despite the group retaining part of the proceeds of the Kiwibank divestment during the year.
In our view, the group's financial flexibility has reduced following its divestment of Kiwibank. The group's shareholding in Kiwibank historically served as a source of financial flexibility and cash flow in the form of dividends received. As a result, we have removed the positive one-notch capital structure modifier to reflect the loss of this high-quality asset. In fiscal 2023, NZ Post sold its 53% stake in Kiwibank to the Crown for NZ$1,117 million. It paid NZ$717 million by way of special dividend to the Crown, retaining the balance of NZ$400 million to fund its transformation investment and restructuring initiatives.
A resilient balance sheet is crucial to offset structurally declining mail volumes and strong competition in the parcels business. In our view, NZ Post's ability to sustain a financial risk profile consistent with the current rating hinges on longer-term parcel growth and cost savings outpacing the structural decline in the mail business. The group is heavily reliant on effective and timely restructuring of its mail operations to stabilize and improve its profitability. While price increases and cost savings (including workforce reduction) are likely to help offset the ongoing volume decline over the next three years, a faster fall in mail volume than we expect may add to earnings pressure.
The New Zealand government's ongoing and timely support remains a key rating strength. In our view, NZ Post will continue to benefit from a very high likelihood of extraordinary support from the New Zealand government in times of financial stress. We also expect the government to provide ongoing support for the group's continued evolution of its cost base to match declining mail volumes and support profitability. This support was seen through the government's equity injection into NZ Post in fiscal 2021, as well as its three-year operational funding support (service contract) to offset losses in the mail business between 2021 and 2023.
The negative outlook reflects the potential for the rating to be lowered in the next 12-18 months if NZ Post is unable to improve its earnings and financial risk profile beyond fiscal 2024 such that the adjusted debt-to-EBITDA is sustainably below 2.5x. Uncertainty remains over the timing and magnitude of transformation and restructuring initiatives, which we expect will deliver earnings uplift and balance sheet relief.
We could lower the rating if we expect NZ Post's debt-to-EBITDA ratio to remain above 2.5x beyond the next 12-18 months. A downgrade could also eventuate if the competitive position and profitability of NZ Post's parcel businesses erodes significantly, even if the group maintains improvement in its financial risk profile.
Pressure on the ratings may also arise if our assessment of the likely level of extraordinary support from the NZ government weakens. This could include a scenario where the government flags its intention to sell down its ownership in the group.
We could revise the outlook to stable over the next 12-18 months if NZ Post restores its profitability and is likely to maintain its adjusted debt-to-EBITDA ratio below 2.5x. Rating stability would also likely rely on the group maintaining its strong position in the parcels market, and benefitting from regulatory support and a credible strategy to mitigate losses in the mail business.
NZ Post is a New Zealand government-owned postal operator, providing nationwide postal and parcel services through a network of up to 880 service points for consumers. The group sold its 53% shareholding in Kiwibank to the Crown in fiscal 2023.
Our Base-Case Scenario
- New Zealand real GDP growth of 1.4% in 2023, 1.8% in 2024, and 2.5% in 2025;
- New Zealand consumer price index growth of 5.7% in 2023, 3.4% in 2024, and 2.6% in 2025;
- Growth in NZ Post's parcel revenue of 5.2% in fiscal 2024 and 5.6% in fiscal 2025 reflecting moderate volume growth and ongoing annual price increases;
- Dip in mail revenue by 1% in fiscal 2024, improving to about 2.6% growth in fiscal 2025. The recovery will be supported by domestic letter-price increases that should offset the ongoing volume decline, and cost savings from the group's workforce reduction of an estimated 700-750 full time employees over the next five years.
- EBITDA margins of about 7.6% in fiscal 2024 reflecting upfront costs associated with the rollout of the network infrastructure program. Margins to improve to low-double digits thereafter, supported by cost saving targets and efficiencies associated with network investment.
- Capital expenditure of NZ$129 million in fiscal 2024, reflecting investments in parcel facilities, including automated processing capacity at super depots;
- No dividend distributions over the next two years; and
- No acquisitions or major divestments over the next 12-24 months.
|New Zealand Post Ltd.--Forecast summary|
|EBITDA margin (%)||12.3||2.8||7.6||11.3||13.9|
|All figures S&P Global Ratings' adjusted. a--Annual. e--Estimate. f--Forecast.|
The short-term rating on NZ Post is 'A-1', reflecting the long-term issuer credit rating and our assessment of the group's liquidity as strong. We expect the group's sources of liquidity to cover 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, NZ Post maintains solid relationships with banks and has a high standing in the credit markets, thanks primarily to the group's government ownership. The company can therefore absorb high-impact, low-probability events without the need for refinancing. The group has no financial covenants under its debt facilities.
Our key assumptions for the group's sources and uses of liquidity over the 12 months from June 30, 2023, are as follows:
Principal liquidity sources
- About NZ$302 million of available cash and short-term investments;
- About NZ$241 million of undrawn committed bank facilities and commercial paper backup facilities with maturities of more than one year; and
- Cash funds from operations of NZ$15 million-NZ$25 million.
Principal liquidity uses
- Commercial paper of NZ$59 million;
- Capital expenditure of NZ$129 million; and
- No dividends.
Environmental, Social, And Governance
ESG credit factors have an overall neutral influence on our credit rating analysis of NZ Post. Although the delivery of parcels and letters exposes the group to increased greenhouse gas emissions, the risk is largely mitigated by the electric vehicle fleet used for last-mile delivery and other environmental initiatives.
We expect NZ Post to benefit from a very high likelihood of extraordinary support from the New Zealand government in times of financial stress. This is based on our assessment of NZ Post's:
- Very important role in the national economy as New Zealand's public postal operator. The company provides collection, processing, distribution of letters and associated services, parcels, logistics, and express mail, as well as retail services through an extensive network in metropolitan, regional, and remote areas of New Zealand; and
- Very strong link with the New Zealand government, which owns NZ Post and maintains a governance framework that allows for extensive influence over the postal authority.
We note, all else being equal, the rating on NZ Post would only be affected if the New Zealand government was downgraded to 'A+'.
Issue Ratings - Subordination Risk Analysis
As of June 30, 2023, NZ Post's capital structure consisted of a bank debt facility of NZ$200 million with a tenor of three years and a commercial paper program of NZ$200 million (of which NZ$59 million was drawn).
We do not view NZ Post's capital structure as representing any material risks, such as structural or contractual subordination.
Ratings Score Snapshot
|Foreign currency issuer credit rating||A/Negative/A-1|
|Local currency issuer credit rating||A/Negative/A-1|
|Diversification/Portfolio effect||Neutral (no impact)|
|Capital structure||Neutral (no impact)|
|Financial policy||Neutral (no impact)|
|Liquidity||Strong (no impact)|
|Management and governance||Fair (no impact)|
|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)|
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
|Ratings Affirmed; Outlook Action|
New Zealand Post Ltd.
|Issuer Credit Rating||A/Negative/A-1||A/Stable/A-1|
New Zealand Post Ltd.
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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.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings.
|Primary Credit Analyst:||Ieva Erkule, Melbourne + 61 3 9631 2085;|
|Secondary Contact:||Aldrin Ang, CFA, Melbourne + 61 3 9631 2006;|
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