Bangkok--4 Nov--Fitch Rates
Fitch Ratings (Thailand) Limited has assigned Tipco Asphalt Public Company Limited (TASCO) a National Long-Term Rating of BBB+(tha) with a Stable Outlook, as well as a National Short-Term Rating of F2(tha).
Key Rating Drivers
Strong Domestic Market Position: The ratings are supported by TASCO’s market leadership in the asphalt business in Thailand. The company has a market share of about 40% in asphalt cement (AC) and more than 60% in asphalt premium products on account of its strong marketing network, reliable delivery and good technical support. Expertise in asphalt products and technical service are the company’s key strengths. TASCO’s long track record in the asphalt business along with technical knowledge from French-based shareholder Colas SA (Colas), which has a 32% investment in TASCO, are key competitive advantages over its local and regional peers.
Geographic Diversification: TASCO operates 18 manufacturing plants in five countries in the Asia-Pacific region, including an asphalt refinery in Malaysia. About 70% of TASCO’s sales are outside Thailand. Its international markets are diversified across five major markets including Indonesia, China, Australia, Malaysia and Vietnam, while the rest are sold in more than 10 countries. Its international sales are also supported by its six owned asphalt vessels resulting in competitive logistic costs and a flexible delivery schedule.
Support from Strong Parent: TASCO is able to leverage advanced technology and a global market network from Colas. Colas has continued to provide the latest technology in new product development and technical training for TASCO under the service agreements. In addition, Colas provides advice, management and marketing services to TASCO.
Exposure to Volatile Crude Oil Prices: However, TASCO is exposed to the fluctuation of raw material prices mainly of crude oil, while 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 takes about 35-45 days, which exposes TASCO to the mismatch between refined product prices and crude oil prices. However, the company mitigates crude oil price risk by using hedging tools, for example, through a four-way collar to protect its margins.
Long Cash Conversion Cycle: TASCO requires high working capital needs to support its long cash conversion cycle. The company’s net cash conversion cycle days has significantly increased from about 50 days in 2008 to the average of about 90 days between 2009-2012 to finance its crude inventory following the start-up of its asphalt refinery. As a result, the company’s short-term debt portion has increased sharply. However, the company has a large amount of uncommitted credit lines from both local and foreign banks with low interest rate to support its liquidity.
High Leverage : Fitch expects TASCO’s financial leverage to continue to remain high in 2013-2014. Expansion and improvement projects with the planned budget of around THB2bn in 2013-2014 are likely to be directed towards refinery expansion and vessel acquisition. While Fitch expects TASCO’s operating cash flow to continue to improve, the large capex would limit TASCO’s develaraging. Its funds from operations (FFO) net leverage is likely to decrease to around 6.0x by end FY14 (FY12 : 7.1x) and drop below 5.0x after 2015.
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Higher-than-expected debt-funded investments leading to a sustained increase in leverage (as measured by FFO adjusted net leverage) to over 6.0x.
- FFO fixed charge coverage below 4.5x
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Maintain FFO adjusted net leverage below 4.0x a sustained basis.