The ratings are primarily driven by the company's strong profitability and integrated business model but constrained by its geographical concentration and limited market positioning.

The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope assigns Ontime Corporate Union S.L. an issuer rating of BB/Stable, a debt category rating on senior unsecured debt of BB and short-term rating of S-3.

Rating rationale

The issuer’s business risk profile is driven by the small size of the company. The group generated around EUR 111m revenues in 2020. Thanks to anticipated organic growth and multiple acquisitions, Ontime expects to triple in size to reach a turnover of EUR 290- 330m in the medium term, although it should remain a small player in the Spanish road logistics market. The current strategy is to participate in the consolidation of the market by acquiring more than five companies in Spain during the next three to four years.

The business risk profile is positively impacted by the very strong operating margins. Historically, Ontime has shown EBIT margins of 8% to 12%. The high profitability derives from the strong integration of the business model where the strategy is to offer services covering all the aspects of the logistics chain. The focus on fully integrated services in Spain was initiated in 2014 and is a key differentiating factor as few Spanish players offer the same level of services. In a very fragmented market where road logistics companies often compete on prices, Ontime achieves high customer retention. This is due to multi- year contracts including high value-added services such as warehousing and automated processes. The high EBIT margin also derives from the strategy of limiting outsourcing. This business model, although profitable, constrains the company’s scalability and is working capital intensive. Therefore, Ontime is currently shifting its business model from relying mainly on its own truck fleet, drivers and warehouses to a more asset light structure by using more subcontractors. This, in addition to the expected acquisitions, should weigh on the company’s profitability in the medium term.

The blended industry risk profile of B+ is constrained by the large exposure to the road logistics sector, which shows very low entry barriers as evidenced by the high market fragmentation, paired with medium cyclicality. The competitive positioning is also constrained by limited geographical diversification. Ontime generates more than 90% of its revenues in Spain.

All in all, the business risk profile is assessed as BB-.

The financial risk profile of the issuer is deemed BB, constrained by the very low to negative cash flow generation. Financial leverage as measured by Scope-adjusted- Debt/Scope-adjusted EBITDA has been decreasing over the past business years to a level of 2.4x as of year-end 2020 from 6.0x in 2018. This is mainly due to the EUR 19m equity injection in 2020 and the synergies of the companies acquired in the last years. The shareholders that have participated in the recent capital increase are composed of executives and other relevant investors who have an industrial profile. Looking forward, we expect the issuer to show leverage in a range of 2.5x to 3.0x for the next two business years, based on our financial base case that incorporates the successful completion of four acquisitions. Nevertheless, the planned investments could lead to volatile credit metrics given that targets still have to be set, in addition to their prices and timing of acquisition. Although Ontime will reduce its capex for the period 2021-2023, the company will continue to have structurally large working capital requirements.

Liquidity is deemed adequate thanks to the 2021 refinancing realized through a syndicated facility and we expect the main part of the remaining short-term financial maturities, including factoring and commercial paper, to be rolled over.

Outlook and rating change drivers

The outlook for Ontime Corporate Union S.L. is Stable. This incorporates financial leverage ranging from 2.5x to 3.0x going forward. Moreover, this forecast assumes that the company is able to successfully complete its expansion plan through various acquisitions and to successfully launch a commercial paper program in 2021 with proceeds earmarked for financing of its working capital.

A positive rating may be warranted if the company improves its FOCF/SaD above 10% on a sustained basis while maintaining its current business risk profile. This could be achieved in the light of improved operating cash flow through a reduced impact from negative working capital.

A negative rating action might be warranted if the company shows financial leverage of more than 3.5x SaD/EBITDA on a sustained basis. A financial leverage exceeding 3.5x could for example be triggered by a significant deterioration of operating profitability in its core segments or higher-than-expected working capital requirements or larger payments for the various acquisitions.

Long-term and short-term debt ratings

Scope assigns a ‘BB’ debt instrument rating to senior unsecured debt of Ontime Corporate Union S.L. This instrument rating is based on a hypothetical liquidation scenario as of year-end 2022, in which we computed an average recovery for senior unsecured debt holders based on our assumptions of attainable liquidation values.

Scope assigns S-3 debt instrument rating to short-term debt. The issuer plans to launch a EUR 50m commercial paper program in 2021. The forecasted level of utilization is to be around 40% to 50%. The assigned S-3 short-term rating reflects the company’s adequate liquidity profile with upcoming debt maturities comfortably covered by internal cash sources, undrawn committed credit lines of EUR 15.3m and a good relationship with its banking pool.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, third parties and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Thomas Langlet, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 September 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate*

Conditions of use/exclusion of liability
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* The sentence was added on 3 September 2021. The sentence was not included in the original publication.