S&P upgrades flat operator Daseke’s debt rating after Moody’s holds line
Several months after Daseke expressed disappointment that one of the major debt rating agencies had not raised its rating, the flatbed operator got his wish when another did.
When Moody’s conducted a review of Daseke (NASDAQ:DSKE) earlier this year, it released a report that said the company’s debt outlook was “stable”, meaning that terms were not in jeopardy. place to suggest an upgrade or downgrade. Daseke officials at the time were unhappy, noting that its flatbed rates were rising even as dry van rates began to drop.
But last week, S&P Global Ratings raised Daseke’s rating from B+ to B+.
“Daseke Inc. continued to improve revenue and leverage while maintaining relatively stable EBITDA margins due to a strong freight rate environment, demand from the industrial end markets the business serves and increased fuel surcharge revenue, partially offset by the persistence of supply chain and inflationary constraints,” S&P Ratings said in its report.
The company’s outlook was rated as stable, which the agency said “reflects our assumption that Daseke will enjoy relatively firm revenue and earnings, supported by favorable near-term demand trends in the cargo market. flat”.
Rating agencies do not comment on the profitability of the companies they rate, although Daseke’s profitability is no secret, given that it is publicly traded. In its latest earnings report, the company reported adjusted earnings per share of 42 cents, flat from the second quarter of 2021. It also raised its full-year 2022 guidance to revenue growth. from 12% to 15%.
At B+, Daseke’s credit rating is still considered non-investment grade, or more colloquially, “junk.” But that’s only four notches in the non-investment grade category.
When Moody’s released its status quo report in April, Daseke CEO Jonathan Shepko told FreightWaves that while dry van rates at the time were down, his company didn’t see that drop in dry van rates. trays. “We actually got price increases from shippers,” he said.
S&P appeared to echo that view, albeit several months later. He said the company’s average freight rate increased 12.2% from fiscal 2020 to fiscal 2021, which is the calendar year. And he said that for the first six months of 2022, the average rate was 10.9% higher than in fiscal year 2021.
(Earlier this week, officials at Universal Logistics (NASDAQ:ULH) told an investor forum they were getting higher flat rates in the third quarter than in the second quarter.)
According to the TSTOPFR.LAXDAL data series in SONAR, the key route from Los Angeles to Dallas showed a drop in flat bed rates between April and August, but started to spin.
Although the total number of kilometers at Daseke has decreased, this is mainly due to delays in receiving new equipment, S&P said.
“Daseke has offset the decline in total miles driven by strategically deploying company-owned assets in end markets that offer higher rates and margins and by shifting excess volumes to its brokerage department,” did he declare.
Strong fixed rates should continue this year, according to the S&P report. For the remainder of 2022, according to the agency, “we expect Daseke to continue to benefit from strong flat freight rates and demand in key industrial end markets, as opposed to consumer-driven retail markets. commodities where rates are softening”.
Rating agencies still focus on the ability to service debt. S&P said in 2021 that Daseke’s debt-to-EBITDA ratio was 3.2X, which was better than the 4X ratio the agency had forecast.
EBITDA in 2021 was driven by high freight rates and lower maintenance costs, partially offset by higher driving costs, S&P said.
That 4X ratio was consistent for the company between 2018 and 2020, S&P said. And if there were a deterioration in spot market rates and macroeconomic conditions, the agency said, “we believe peak leverage would likely reach these levels, which would still be in line with a ‘B+’ rating.” .
Agencies also focus heavily on capital spending, as debt payment and free cash flow are linked and can be impacted by the size of capital spending. S&P said Daseke’s capital expenditure is expected to be $70 million this year, up from $53.7 million last year. But part of the higher number in 2022 is due to the $25 million allocated last year that went unspent because OEMs couldn’t provide equipment.
The S&P estimate of free cash flow to debt is 12% to 14% this year and will improve to 16% to 18% next year.
One bright spot noted by S&P Ratings was unusual: higher revenue from fuel surcharges. Even citing this as a benefit to the business – “we … believe Daseke’s revenues will benefit from higher fuel surcharges for the remainder of 2022,” S&P said – he also admitted that the higher revenues do not affect not a big part of the bottom line. The fuel surcharges, according to S&P, are “primarily a pass-through that does not materially affect EBITDA or cash flow.”
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