Bangkok--25 Oct--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Tipco Asphalt Public Company Limited's (TASCO) National Long-Term Rating at 'A-(tha)' and the National Short-Term Rating at 'F2(tha)'. The Outlook is Stable.
KEY RATING DRIVERS
Local Market Leader: TASCO is Thailand's leading asphalt producer, with a domestic market share of about 40% in asphalt cement sales and more than 60% in sales of asphalt premium products. Fitch expects TASCO to maintain its leading market positions over the next five years by leveraging its long track record in the asphalt business and solid technical know-how.
Geographic Diversification: TASCO is also a key regional player operating 41 manufacturing plants in seven countries in Asia, including an asphalt refinery in Malaysia. About 70% of sales are outside Thailand – the five major markets are in Indonesia, China, Australia, Malaysia, and Vietnam, with markets in another ten countries – supported by its own charter business. The different demand patterns in each of the markets across business cycles should help smooth out TASCO's cash flow.
Margin to Decline: Fitch expects TASCO's gross margin to remain strong at above 15% in 2016, thanks to the low crude cost and increased domestic sales in 1H16. The margin is likely to decline in 2017 to around 10%-12%, due to a recovery in oil prices and asphalt prices being pressured by increasing supply. However, given Fitch's expectation that crude oil prices are not likely to recover to pre-2015 levels of USD80-100 per barrel, TASCO's profitability should remain solid over the next two years and above 2013-2014 levels.
Expansion can be Accommodated: TASCO has a five-year investment plan (committed and uncommitted projects) of up to THB8.0bn to expand its global footprint and enhance its product portfolio as it pursues its goal to become a global player. The investments will increase leverage over the next five years. However, Fitch expects TASCO's FFO-adjusted net leverage to stay below 4.0x, the level at which Fitch would consider negative rating action, given the low leverage of 0.3x in 1H16 and its projected FFO of about THB3.0bn a year.
Exposure to Volatile Oil: TASCO is vulnerable to fluctuations in the prices of raw materials – mainly that of crude oil – although its asphalt product prices are not correlated with the movement of crude oil prices in the short term. The long lead time of transporting crude from South America to its asphalt refinery in Malaysia exposes TASCO to a mismatch between refined product prices and crude-oil prices. However, the company partly mitigates crude-oil price risk by using hedging tools to protect its margins.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for TASCO include:
- target proportion of asphalt cement to premium asphalt sales volume at about 90:10
revenue growth of around 10% in 2017, followed by around 20% in the subsequent two years due to oil prices recovery
- overall gross margins to fall to around 16% in 2016, and gradually decline after that to 9%-10%;
dividend payout ratio at 40%- 50% in 2016-2017;
- capex of THB3.0bn-4.0bn in 2016 and THB1.0bn-2.0bn a year in 2017-2018
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- a significant increase in operating scale or revenue diversification that helps improve its business profile while maintaining leverage, as measured by FFO-adjusted net leverage, below 2.0x
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- leverage above 4.0x on a sustained basis due to large debt-funded investments, thin industry margins or crude-oil prices sustained at above USD100 per barrel