Bangkok--12 Apr--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed SVI Public Company Limited’s (SVI) National Long-Term rating at ‘BBB+(tha)’ and its National Short-Term rating at ‘F2(tha)’. The ratings have been removed from Rating Watch Negative (RWN). The Outlook is Stable.
The rating action reflects Fitch’s view that risks of a potential loss of major customers due to the Thai flooding in Q411 have now eased and that the company is, therefore, likely to maintain its business and financial profile commensurate with the current ratings in the medium term.
As of end-March 2012, the vast majority of SVI’s customers remained committed to their product manufacturing contracts with SVI, due to the long-standing relationship and reputation SVI has with these customers. Only one customer (who contributed around 5% of total revenue pre-floods) withdrew its order in consequence of the floods. In addition, SVI’s ability to swiftly restart production helped regain customer confidence. At end-Q112, SVI’s production capacity was restored to around 70% of its output level prior to the floods, and Fitch expects the company to achieve full production capacity in Q312.
Cash inflow from the insurance proceeds expected in H212 and the absence of a dividend payout in 2012 should help partly offset the potential advserse impact on SVI’s earnings and cash flow from lower revenue, higher capex and an increase in working capital. In Fitch’s view SVI’s net cash of THB540m at end-2011 should provide flexibility to support lower earnings, higher expenses and potentially negative free cash flow (FCF) in 2012. SVI is likely to maintain its funds from operations (FFO)-adjusted net leverage below 1.0x over the next two years.
SVI continues to benefit from long-term growth prospects in the electronic manufacturing service (EMS) market, driven by end-market demand and an increasing trend of original equipment manufacturer (OEM) outsourcing orders to EMS manufacturers. The company focuses on the growing non-traditional end-product segment, which is less volatile, offers higher margins and, over the past few years, has helped sustain SVI’s operations and business profile amid a challenging operating environment.
SVI’s ratings are constrained by its narrow geographic coverage, its concentrated customer base, likely intense competition in the non-traditional EMS market, and technology risks associated with the electronic segment. Other constraints include its volatile working capital requirement and its exposure to foreign exchange risk. The appreciation of the Thai baht against US dollar during the manufacturing cycle could result in lower revenue recognition in Thai baht terms and, consequently, lower profit margin and earnings. However, this is partly offset by the company’s purchase of forward contracts.
The ratings may benefit from a substantial increase in the company’s scale with revenue exceeding USD500m and greater diversification in terms of customer mix and geographical market coverage, providing that the company is able to maintain an EBITDAR margin of over 10% on a sustained basis. Conversely, SVI’s ratings may be negatively impacted by a substantial increase in net debt due to high dividend payouts, greater-than-forecast capex or large debt-funded acquisition leading to FFO-adjusted net leverage above 1.0x on a sustained basis. Other negative rating guidelines include a decline in its EBITDAR margin below 6% on a sustained basis, deterioration in its market position or loss of key customers.