Fitch Affirms Thailand's TASCO at 'A-(tha)'; Stable Outlook

Stocks News Wednesday October 18, 2017 16:49 —PRESS RELEASE LOCAL

Bangkok--18 Oct--Fitch Ratings Fitch Ratings (Thailand) has affirmed Tipco Asphalt Public Company Limited's (TASCO) National Long-Term Rating at 'A-(tha)' and National Short-Term Rating at 'F2(tha)'. The Outlook is Stable. KEY RATING DRIVERS Strong Credit Metrics: Fitch expects TASCO's financial position to remain strong due to stable operating cash flow and low financial leverage over the next three years, driven by modest increases in crude-oil prices. The low leverage of 0.6x in 1H17, as measured by FFO adjusted net leverage, will provide financial headroom for the company's investments. Expected cash flow from operations of about THB1.5 billion-2.5 billion a year should be enough to support planned capex and investments. Strong Market Position: TASCO's ratings are underpinned by its leading position in Thailand's asphalt market, with market share by sales volume of roughly 40%. TASCO also has strong market positions in Indonesia and Vietnam, with market share of about 30% in both countries. TASCO's wide product portfolio across conventional and premium segments, strong logistic capability via its nine owned vessels and 300 truck fleets and expertise in pavement services should secure its leadership over the medium term. Geographic Diversification: TASCO operates more than 40 production plants in seven countries in Asia, including crude refinery in Malaysia, and 70% of its asphalt product sales volume in the latest 12 months to 2Q17 was from overseas, primarily Indonesia, China, Malaysia, Vietnam and Australia. The company has also expanded its footprint in East Malaysia and Laos via joint ventures. Fitch believes the diverse revenue stream will help smooth TASCO's cash flow across business cycles. For instance, in 1H17, strong demand in Vietnam and India helped soften the impact from declines in several markets, including Thailand, while the domestic market supported sales volume growth in 2016. Narrowing Profit Margins: Fitch expects TASCO's gross margin to shrink as oil prices increase, but it should remain sound, at about 12%-14% in 2017-2018, from 16% in 1H17 and 17% in 2016. This is based on our expectation that benchmark Brent crude will not recover to pre-2015 levels of USD80-100 per barrel. Exposure to Volatile Oil: TASCO is vulnerable to fluctuations in raw material prices, mainly that of crude oil, although its asphalt product prices are not correlated with crude oil price movements in the short term. The long lead time from transporting crude from South America to its Malaysian asphalt refinery 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. DERIVATION SUMMARY TASCO is smaller than peers in the building-materials sector - including The Siam Cement Public Company Limited (SCC, A(tha)/Positive) and Siam City Cement Public Company Limited (SCCC, A(tha)/Stable) - with a lower EBITDAR margin. The cement business gives SCC and SCCC better earning visibility and wider end-user segments against TASCO's asphalt business. SCC is also exposed to volatile oil prices in its chemicals business, but it has a superior business profile and more diversified businesses. The cement peers' stronger business profiles warrant higher ratings than for TASCO. TASCO has significantly smaller operating scale than oil refiner, IRPC Public Company Limited (A-(tha)/Stable). However, TASCO's business is more stable and generates higher margins. It also has lower financial leverage, which results in a higher rating than IRPC's 'BBB+(tha)' standalone rating. IRPC's National Long-Term Rating incorporates a one-notch uplift to reflect linkage with its single largest shareholder, PTT Public Company Limited (AAA(tha)/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Flat sales volume for asphalt products in 2017 then increase by about 10% in 2018 (2016: 2.7% growth) - Revenue to strongly increase by above 20% in 2017 due to higher oil prices, then soften to below 5% growth in 2018 (2016: 35% decline) - Overall gross margin to fall to 12%-14% in 2017-2018 - Dividend payout at about 50%-60% in 2017-2018 - Capex and investments of about THB1.0 billion-1.5 billion a year in 2017-2018 RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - A significant increase in operating scale or revenue diversification that helps improve TASCO's business profile while sustaining FFO adjusted net leverage at below 2.0x. Developments that May, Individually or Collectively, Lead to Negative Rating Action - A rise in leverage, as measured by FFO adjusted net leverage, to above 4.0x for a sustained period due to large debt-funded investments or significantly thinner industry margins. LIQUIDITY Comfortable Liquidity: TASCO had outstanding debt of THB2.6 billion at end-June 2017. THB2.2 billion due to mature within 12 months was mostly short-term revolving facilities used to finance working capital. Liquidity is partly supported by cash on hand of THB0.9 billion and strong access to bank funding. TASCO had available uncommitted credit facilities of THB43.1 billion from local and foreign banks at end-June 2017.

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