DBRS Limited (DBRS Morningstar) confirmed Shawcor Ltd.’s (Shawcor or the Company) Issuer Rating at BB (low) and its Senior Unsecured Notes (the Notes) rating at B (high), both with Stable trends. The Recovery Rating on the Notes remains RR5. The rating confirmations and Stable trends reflect DBRS Morningstar’s expectations that, despite a slowing economic backdrop, Shawcor will likely deliver strong operational execution and results over the near term, which should strengthen the Company’s key credit metrics. Depending on the use of proceeds, credit metrics could also benefit from the potential divestitures as part of Shawcor’s ongoing strategic review. The ratings continue to be supported by the Company’s predominant leadership position in most of its business divisions, its diverse customer and geographic bases, strong technical expertise, and favourable long term economic trends that should continue to support the business risk profile over the medium to long term. The ratings also consider Shawcor’s still significant exposure to the highly cyclical oil and gas sector, high capital intensity, fluctuating cost of raw materials, and the still nascent but sharply growing water tank business in which the Company is looking to build a full spectrum of offerings.
DBRS Morningstar forecasts Shawcor’s sales to be exceptionally strong in F2023, reaching more than $1.7 billion before moderating toward $1.5 billion in F2024 versus $1.2 billion during the last 12 months ended September 30, 2022 (LTM 2022). DBRS Morningstar expects the F2023 increase to be largely driven by a sharp increase in revenues from the Pipeline and Pipe Services segment, benefitting from a strong order backlog, combined with continued solid growth in both the Composites and Automotive & Industrial segments. The F2023 revenue growth also reflects DBRS Morningstar’s expectation that the Composites segment will continue to outperform because of strong demand in the fuel tank and water businesses and growing demand for the larger diameter composite pipes. The Automotive & Industrial segment should benefit from growing infrastructure spending and increasing adoption of electric/hybrid vehicles, which in turn will keep the demand healthy for its highly engineered wire cable and heat shrink products. DBRS Morningstar anticipates revenues in F2024 to moderate as the Company works through some of the order backlog in the Pipeline and Pipe Services segment. Although the Pipeline and Pipe Services segment has historically weighed on the Company’s EBITDA, the forecast of a strong performance in F2023 coupled with solid performance in the remaining segments should result in Shawcor’s EBITDA growing materially to more than $225 million in F2023 before moderating in F2024 to approximately $200 million versus $111 million during LTM 2022.
In the context of the ongoing strategic review of the remaining components of the Pipeline and Pipe Services segment, DBRS Morningstar anticipates some probability of significant portfolio simplification actions within the next 12 months. While the timing as well as the amount and use of proceeds is not yet known, DBRS Morningstar anticipates any proceeds, combined with the Company’s cash flow from operations, to be primarily directed toward repayment of any outstanding amounts under the secured credit facility, capital expenditures (capex), bolt-on acquisitions, and/or shareholder returns. DBRS Morningstar expects capex will likely be focused in the Composites segment where the Company is looking to grow capacity in the fuel tank business and its capabilities in the water subsegment, with overall capex across the three segments (Composites, Auto & Industrial, and Pipeline and Pipe Services) forecast to increase to more than $100 million in each of F2023 and F2024. Despite higher capex, DBRS Morningstar forecasts the Company to generate free cash flow (FCF; after changes in working capital, dividends, and lease principal payments) of more than $60 million in 2023 and for FCF to remain more than $35 million in F2024 from $35 million in LTM 2022. That said, DBRS Morningstar expects cash flow uses to include significant shareholder remuneration over the next couple of years. Excluding potential plans for debt-funded shareholder rewards, DBRS Morningstar expects credit metrics to further strengthen in F2023, with the cash flow from operations-to-debt ratio climbing to more than 50.0% and debt-to-EBITDA trending to 1.50 times (x), which is considered strong for the current rating, before moderating somewhat in F2024, which compare with 25.0% and 2.57x, respectively, in LTM 2022.
DBRS Morningstar could take a positive rating action, should Shawcor continue to demonstrate solid operational performance, expand its operational profile in the Composites and Auto & Industrial segments, successfully implement its portfolio simplification initiatives, and improve its credit metrics on a normalized and sustainable basis (i.e., debt-to-EBITDA below 2.00x). However, should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA increase above 4.00x with a commensurate weakening of the Company’s other key credit metrics) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies applicable to the rating are Rating Companies in the Industrial Products Industry (https://www.dbrsmorningstar.com/research/391382; January 28, 2022), Rating Companies in the Oil and Gas and Oilfield Services Industries (https://www.dbrsmorningstar.com/research/402196; August 31, 2022), DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (https://www.dbrsmorningstar.com/research/402218; September 1, 2022), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (https://www.dbrsmorningstar.com/research/394683; April 4, 2022).
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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