Bangkok--14 Feb--Fitch Ratings
Fitch Ratings (Thailand) Limited has revised Siam Cement Public Company Limited's (SCC) Outlook to Positive from Stable. The ratings have been affirmed at National Long-term 'A(tha)' and National Short-term 'F1(tha)'. The National Long-term rating of its senior unsecured debentures has also been affirmed at 'A(tha)'. In addition, Fitch has assigned SCC's proposed senior unsecured debentures No.1/2011 due 2015, amounting up to THB15bn, a National Long term 'A(tha)' rating. The proceeds from the new issue will be used to refinance SCC's maturing debentures.
The Outlook revision follows a decline in SCC's financial leverage as a result of stronger-than- expected cash flow generation and a one-time cash inflow from divesting its shares of PTT Chemical Public Company Limited (PTTCH; 'A+(tha)'/Stable) in Q410. SCC's financial leverage - as measured by adjusted net debt to EBITDAR including dividends from associates - at end-2010 of 2x (FYE09: 2.8x) was significantly lower than Fitch's expectations. This has improved SCC's rating headroom for unfavorable operating conditions as well as for higher investment in 2011.
SCC's ratings reflect diversified cash flow generation from its three core businesses - petrochemicals, cement and paper. Although the chemical business accounts for the largest part of its cash flow generation, earnings from the cement and paper operations are likely to help support cash flow generation during tough operating periods for its chemicals business. Product diversification within SCC's chemical business helps reduce the impact of margin contraction in any chemical product chains. The ratings are also supported by the company's leading position in its businesses in Thailand, extensive and long-established distribution channels, strong brand recognition in the domestic market, and management's strong track record.
The ratings also take into account the group's enlarged operating scale following the completion of the second naphtha cracker and its captive downstream plants in 2010. Furthermore, the group's joint-venture downstream plants, most of which produce high value added products, have gradually begun commercial operations since H210.
SCC's operating margins are expected to be pressured by a surplus supply in the global petrochemical market in 2011. However, the impact on SCC's earnings is likely to be less severe than what Fitch expected in early 2010 due to global economic growth led by Asian countries and a shortage of gas feedstock for new crackers in the Middle East. Furthermore, Fitch expects cost savings arising from SCC's enlarged operating scale and efficiency improvements to ease the pressure on operating margins.
SCC's credit profile is constrained by the cyclicality of its core businesses and by Thailand's large excess capacity in cement and paper. While the impact of excess chemical supply should bottom out and chemical product-to-feed margins should stabilize in H211, rising oil prices are likely to constrain any margin recovery in 2011.
SCC's Long-term ratings may be upgraded if financial leverage remains below 2.5x on a sustained basis. Conversely, the Outlook could be changed back to Stable if large business acquisitions and/or sharper-than-expected margin contraction result in SCC not being able to maintain leverage comfortably below 2.5x.