(The following statement was released by the rating agency)
Dec 20 -
Summary analysis -- JCDecaux S.A. --------------------------------- 20-Dec-2012
CREDIT RATING: BBB/Stable/A-2 Country: France
Primary SIC: Advertising
Credit Rating History:
Local currency Foreign currency
13-Oct-2010 BBB/A-2 BBB/A-2
22-Sep-2009 BBB/A-3 BBB/A-3
The rating on France-based JCDecaux S.A. reflects Standard & Poor’s Ratings Services’ view of the group’s business risk profile as “satisfactory,” as our criteria define the term, considering its standing as the world’s largest outdoor advertising group, and its “intermediate” financial risk.
JCDecaux’s key business strengths include its strong global positions in outdoor advertising, especially in the core street furniture and airport advertising sectors, where it is a worldwide leader, which we believe offer long-term growth prospects. Other strengths relate to its high contract renewal rates and EBITDA margins at its street furniture business, which we view as generally offering greater EBITDA margin stability than its billboard or transport operations. The group’s good geographic diversification and growing presence in emerging markets are also supporting factors for our assessment of the company’s business risk profile, as well as its sound EBITDA margins broadly in line with global peers’. Tempering these positive factors are JCDecaux’s exposure to advertising cycles, which tend to exaggerate GDP swings, its high fixed-cost base, and the start-up costs of its street furniture business.
Our view of JCDecaux’s financial risk profile takes into account the group’s moderately high leverage--mainly owing to sizable operating lease commitments at its street furniture and transport businesses--which we capitalize, and sound free operating cash flow (FOCF). We view JCDecaux’s financial policies as moderate, reflecting the group’s fairly active merger and acquisition (M&A) history, but also its moderate financial debt, prudent dividend policy, and liquidity management.
S&P base case operating scenario
In our base-case assessment we continue to anticipate that JCDecaux’s organic revenues will grow in the low single digits in 2012, taking into account the deteriorating global economic environment, especially in Europe where the group has a large presence. We expect organic revenues to weaken in 2013, reflecting our view that advertising markets in Southern Europe may continue to contract while we expect growth in larger advertising markets such as the UK, France, and Germany to wane next year. On the positive side, we think the group’s operations in emerging markets, accounting for about a quarter of revenues, will continue to support the group’s revenue growth in 2013, especially through its transport division, which continues to benefit from growing infrastructure needs and transit volumes in countries such as China. This scenario is based on our latest economic forecasts of a mild recession in 2012 in the eurozone (European Economic and Monetary Union), and of flat GDP growth in 2013 (see “The Eurozone’s New Recession--Confirmed,” published Sept. 25, 2012, on RatingsDirect on the Global Credit Portal). We foresee a 33% chance of a severe recession next year in Europe.
We also believe our base-case forecasts are supported by JCDecaux’s latest reported revenue growth of 7.4% for the first nine months of 2012, or 2% on an organic basis, essentially driven by continued organic growth at its transport division, which reached 8.3% year-on-year.
We forecast that JCDecaux’s reported EBITDA margin might fall moderately in 2012 compared with 2011. JCDecaux reported an operating margin of 21.8% in the first half of 2012, down about 40 basis points year-on-year. We also believe that our base-case revenue assumption for 2013 for the group may translate into a stable or moderately lower EBITDA margin next year. This is partly owing to our view that the street furniture division might find it difficult to maintain stable margins next year, although we believe street furniture revenues could grow in 2013.
We consider JCDecaux’s management and governance as satisfactory, as defined under our criteria.
S&P base case cash flow and capital structure scenario
We forecast that JCDecaux’s adjusted debt-to-EBITDA ratio will be about 3x in 2012, including the acquisition of 25% of Russian outdoor advertising leader Russ Outdoor, in line with the current ratings and broadly stable from the 3x achieved in 2011. Under our base-case assumptions for 2013, and without any large or midsize acquisitions, we expect adjusted leverage to remain in the low 3x in 2013.
We expect JCDecaux’s ratio of adjusted funds from operations (FFO) to debt to remain broadly stable year-on-year at 32% in 2012, although we believe it could weaken slightly in 2013.
We forecast capital expenditure (capex) about EUR180 million range and acquisitions of about EUR100 million per year in 2012 and 2013, resulting in unadjusted FOCF of between EUR250 million and EUR300 million during the period. The group didn’t pay dividends in 2009 and 2010 to prudently preserve balance sheet strength, but resumed dividend payments in 2012 amounting to about EUR105 million, or almost two thirds of FOCF. While we view this proportion as fairly high, we would expect JCDecaux to maintain a sound capital structure by balancing such payments with potential sizable acquisition spending. Importantly, in analyzing adjusted ratios, we remain mindful that operating lease adjustments accounted for over two thirds of gross adjusted debt in 2011. On a reported, or unadjusted by Standard & Poor’s basis, the group’s net debt-to-EBITDA ratio fell to 0.2x in year ended June 30, 2012 from 0.5x in the same period last year.
Our short-term rating on JCDecaux is ‘A-2’. We assess the group’s liquidity as “adequate” under our criteria, supported by our view that JCDecaux’s liquidity sources will exceed its funding needs by more than 1.2x in the next 24 months.
As of June 2012, we estimated JCDecaux’s liquidity sources to be in excess of EUR1.3 billion over the next 12 months. These included:
-- Cash balances of about EUR300 million;
-- A fully available committed revolving credit line (RCF) of EUR600 million maturing in 2017; and
-- FFO of about EUR450 million over the next twelve months.
We estimate JCDecaux’s liquidity needs over the next 12 months to be about EUR700 million, including:
-- Working capital movements linked to operational requirements estimated at about EUR30 million;
-- Capex of about EUR180 million a year for the next two years, of which over 50% is considered growth capex, which could be curtailed if needed, although we realise that this would affect future earnings growth;
-- Our acquisitions and dividend payments combined assumptions of about EUR200 million per in the next 12 months; and
-- Debt maturities of about EUR280 million in 2013, including overdrafts.
The group’s headroom under covenants is ample and we expect it to remain so under our base case, leaving a substantial cushion for potential operating underperformance.
The stable outlook reflects our expectation that, under our base-case scenario, JCDecaux will be able to maintain fairly stable earnings and FOCF generation for the next 12 to 18 months despite our anticipation of a very weak economic environment in most of its main European markets during the period. This is specifically because of our anticipation of continued growth at its transport division next year. We also expect JCDecaux to maintain a moderate financial policy and a sound capital structure by balancing dividend payments with potential sizable acquisitions. Sustained ratios of Standard & Poor’s adjusted FFO to debt of about 30% and adjusted debt to EBITDA of under 3.5x would be in line with the current rating, bearing in mind that capitalized minimum franchise payments account for the bulk of adjusted debt.
We might lower the rating if the group’s earnings and free cash flow generation fell significantly below our expectations or if it implemented a substantially more aggressive financial policy, through sizable debt-financed acquisitions and shareholder returns, for example, which would result in FOCF and credit measures being sustained below our expectations.
We currently see any upgrade potential as unlikely over the short-to-medium term given our base-caseassumptions. We might consider an upgrade, however, if JCDecaux was to improve its adjusted ratios of FFO to debt and debt to EBITDA to above 35% and below 3x, respectively, on a sustainable basis. We would also, as part of any potential upgrade, expect JCDecaux’s profitability levels to remain sound and close to current levels, and its financial policy to be supportive of a higher rating in terms of acquisitions and shareholder-friendly initiatives.
Related Criteria And Research
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Standard & Poor’s Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008