Bangkok--18 Dec--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Tipco Asphalt Public Company Limited’s (TASCO) National Long-Term Rating at 'BBB+(tha)' and its National Short-Term Rating at 'F2(tha)'. The Outlook is Stable.
Key Rating Drivers
Leverage to Improve: TASCO’s financial leverage and operating cash flows are likely to improve in 2014, although the company’s financial leverage was higher than Fitch’s expectation in 2013. This is mainly due to a decrease in crude oil price from 3Q14 onwards. Lower crude oil prices should reduce TASCO’s working-capital needs, which will decrease its short-term debts. Lower crude oil prices are likely to widen TASCO’s product-to-feed spreads as well. Fitch expects FFO adjusted net leverage to drop to below 6.0x by 2015 from 7.4x in 2013.
Strong Domestic Market Position: The ratings reflect TASCO’s market leadership in Thailand’s asphalt business, with a domestic market share of about 40% in asphalt cement and more than 60% in asphalt premium products. This is thanks to its strong marketing network, reliable delivery and solid technical support. TASCO’s key competitive advantages over its local and regional peers are a long track record in the asphalt business, along with technical knowledge and access to a global market network through its 32% shareholder, France-based Colas SA.
Geographic Diversification: TASCO operates 18 manufacturing plants in five countries in the Asia-Pacific region, including an asphalt refinery in Malaysia. About 66% of sales are outside Thailand - its five major markets are Indonesia, China, Australia, Malaysia and Vietnam, and it has sales in more than 10 other countries. International sales are also supported by its ownership of seven vessels, resulting in competitive logistic costs and a flexible delivery schedule.
Exposure to Volatile Oil: TASCO is exposed to the fluctuation in the prices of raw material- 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 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.
Long Cash Conversion Cycle: TASCO requires a lot of working capital to support its long cash conversion cycle. The company’s net cash conversion cycle days increased from about 50 days in 2008 to the average of about 90 days between 2009-2012 because it needed to finance its crude inventory following the start-up of its asphalt refinery in Malaysia. Its net cash conversion cycle days increased to 122 days due partly to an additional crude cargo at the end of 2013. However, Fitch expects it to drop to 90-100 days in 2015-2018.
Rating Sensitivities
Positive: Positive rating action is unlikely over the next 12-18 months, due to the company’s expected high leverage.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Sustained rise in leverage (as measured by FFO-adjusted net leverage) to above 6.0x due to large debt-funded investments and thin industry margins, and/or
- FFO fixed-charge coverage below 4.5x.