TRIS Rating Affirms Company & Senior Unsecured Debt Ratings and Outlook of “TRT” at “BBB+/Stable”

Stocks News Friday February 27, 2015 16:31 —TRIS News Release

TRIS Rating has affirmed the company and senior unsecure debenture ratings of Tirathai PLC (TRT) at “BBB+” with “stable” outlook. The ratings reflect the company’s position as the leading electrical transformer manufacturer in Thailand, plus its ability to provide both power and distribution transformers across a diverse range of capacities and system voltages. TRT’s competitive edge is enhanced by a license agreement with Siemens Transformers Austria GmbH & Co KG (Siemens) from Austria. The license agreement supports the company’s efforts to enter new markets. The ratings also take into consideration the rising electricity consumption in Thailand and TRT’s opportunities in export markets. These strengths are partially offset by customer concentration risk as a large portion of TRT’s sales are made to three electricity authorities, which are state-owned enterprises. The ratings are also hampered by intensifying competition, and TRT’s reliance on agents to service its export markets. The “stable” outlook reflects the expectations that TRT will maintain its competitive position, improve its profitability, and boost its operating cash flow. For the next one to two years, the chance of any rating upside is limited. The credit downside could emerge if TRT’s EBITDA falls below Bt300 million, and the debt to capitalization ratio exceeds 40% for a sustainable basis.

TRT was founded in 1987 and listed on the Market for Alternative Investment (mai) in May 2006. Mr. Sumpan Vongphan, the managing director, and the key managers are the company’s major shareholders, with a combined stake of 30% as of December 2014. TRT is able to manufacture both power and distribution transformers. TRT’s power transformers have capacities up to 300 megavolt-amperes (MVA), at system voltages up to 230 kilovolts (kV). The distribution transformers range in capacity from 1 kilovolt-amperes (KVA) to 10 MVA, at system voltages up to 36 kV.

Apart from selling transformers, TRT also expanded into the assemble and distribution of hydraulic crane trucks in 2011, via its wholly-owned subsidiary, Tirathai E&S Co., Ltd. (E&S). In 2012, the company bought an 85% stake in L. D. S. Metal Work Co., Ltd. (LDS), a manufacturer of custom-made metalwork, in order to secure its transformer casings and diversify into metalwork products.

In 2014, the sales of distribution transformers comprised 37% of TRT’s total revenue, followed by power transformers (36%), the revenue from two subsidiaries (E&S and LDS, 23%), and services revenue (3%). TRT faces some customer concentration risk. Three state enterprises, the Metropolitan Electricity Authority (MEA), the Provincial Electricity Authority (PEA), and the Electricity Generating Authority of Thailand (EGAT), are its major customers. The three state enterprises typically account for one-third of TRT’s annual revenue. The revenue derived from the three state enterprises averaged 35% of TRT’s total revenue during the past five years, followed by private companies (34%), and export customers (17%). The three electricity authorities remain the largest users of transformers. They are responsible for the development and maintenance of the national electricity transmission grid. Their credit qualities are considered acceptable, reflecting their positions as government agencies and their good payment records.

In the power transformer segment, there are four power transformer manufacturers in Thailand. TRT is one of the three producers who are qualified to sell power transformers to state enterprises. Competition in the power transformer segment is less intense compared with the distribution transformer segment. However, the competition in power transformer industry has increased over the past few years. The increased competitive pressures come from three sources: imported products from Chinese manufacturers holding licenses for internationally known brand names, a capacity expansion by a local power transformer maker, and a newcomer expanding out of the distribution transformer segment. However, the competitive pressures have eased to some extent. The import tariff for large power transformers (capacities ranging between 200-300 MVA) was raised from 1% of the product value to 10% in 2012. Moreover, TRT’s competitive position is strengthened because it has a license from Siemens, a world-renowned transformer maker. Under the terms of the license agreement, Siemens provides support for TRT’s product designs and serves as a market reference for TRT’s power transformers.

In the distribution transformer segment, competition is fairly intense, as there are more than 20 manufacturers in Thailand. However, half of them are small manufacturers and are not qualified to supply to the electricity authorities or large corporations. TRT is a major player providing a wide range of products in this segment. TRT ranks among the top five in terms of the sales of distribution transformers, with a market share of around 11% in 2013.

TRT’s financial performance suffered in 2014 due to the recent political crisis in Thailand. The political conflict starting in late 2013 caused the delay in bidding of many state enterprise projects and hampered the investment plans of the private sector. The EGAT and the PEA suspended the bidding for electricity transformers from the fourth quarter of 2013 through all of 2014. The value of the transformers TRT sold to the state enterprises and to private sector customers plunged by 46% year-on-year (y-o-y) and 15% y-o-y, respectively. The significant drops in revenue from state enterprises and private sector customers were partially offset by rises in export orders and a greater contribution from TRT’s subsidiaries. As a result, TRT’s total revenue was Bt2,132 million in 2014, slipping by 15% from 2013.

TRT’s operating margin also weakened. The operating margin before depreciation and amortization plunged to 6.7% in 2014, from 12.5% in 2013. The drop came because of a decreased contribution of transformers sold to state enterprises, and a price cutting among local transformer makers, competing to get orders from private sector projects. Generally, the sales of transformers to state enterprises carry higher margin than the margin generated from other sectors. Moreover, TRT’s selling, general and administrative (SG&A) expenses remained high, despite a drop in revenue. Therefore, TRT’s funds from operations (FFO) declined to Bt200 million in 2014, from Bt342 million in 2013.

At the end of 2014, TRT’s total debt amounted to Bt961 million, rising from Bt880 million at the end of 2013 to finance its capacity expansion. The debt to capitalization ratio increased to 45%, from 42.6% at the end of 2013. As a result, TRT’s liquidity profile softened. TRT’s FFO to total debt ratio declined to 20.8% in 2014, from 38.9% in 2013. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio decreased to 3.8 times, from 7.3 times during the same period.

TRT’s financial performance is expected to improve once the state enterprises resume normal scheduled bidding and private sector investment rebounds. Additionally, TRT had a backlog of Bt1,206 million at the end of 2014. About 84% of the backlog was products scheduled to be delivered in 2015. Moreover, TRT is in a bidding process for new orders worth approximately Bt7,400 million at the end of December 2014. From its past track record, TRT’s bidding success ratio is about 20%. Under TRIS Rating’s base case scenario, TRT’s revenue is expected to grow in a range of Bt2,400-Bt2,700 million per year over the next three years. FFO and EBITDA are expected to be Bt200 million and Bt300 million per year, respectively. The debt to capitalization ratio is expected to slide to below 40% in 2015-2017 as a result of TRT’s lower investment plan.

TRT has Bt600 million in debentures maturing in June 2015. The company will refinance this debenture issue by issuing new debentures worth Bt400 million. At the end of 2014, TRT’s liquidity sources included Bt570 million in cash on hand and an undrawn short-term credit facility of around Bt1,800 million.

Tirathai PLC (TRT)
Company Rating: BBB+
Issue Rating:
TRT156A: Bt600 million senior unsecured debentures due 2015 BBB+
Rating Outlook: Stable
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