Bangkok--13 May--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 the potential loss of major customers due to the fire at SVI’s plant in 4Q14 is now very unlikely and that the company is able to maintain business and financial profiles commensurate with the ratings in the medium term.
KEY RATING DRIVERS
Strong Customer Commitment: As of end-March 2015, the majority of SVI’s customers remained committed to their product manufacturing contracts, due to the long-standing relationships and strong reputation the company has with these customers. This was helped by SVI’s ability to swiftly restart production. By end-1Q15, SVI’s production capacity returned to around 70%-80% of its level prior to the fire at its plant in Bangkadi Industrial Estate in Pathumthani Province in November 2014. Fitch expects the company to return to full production capacity by end-2015 and revenue to rise over the next three years to the level before the fire.
Solid Financial Position: SVI’s large cash balance and the cash inflow from the insurance proceeds should help offset the adverse impact on SVI’s financial position from lower revenue, higher capex and the increase in working capital requirement in 2015. SVI’s cash balance of THB3.9bn at end-2014 should be more than enough to fund the increase in capex and working capital requirements in 2015. SVI is likely to maintain its net cash position over the next two years despite the possibility of negative free cash flow (FCF) in 2015. At end-2014, the company had no debt.
EMS Growth Opportunity: SVI continues to benefit from stability in the electronic manufacturing services (EMS) market, which is driven by industrial demand. In addition, manufacturers increasingly rely on EMS providers in their overall supply chain, in particular outside the consumer electronics sector. The company’s strategy to focus on the growing non-traditional end-market segment, which is less volatile and offers higher margin, has helped sustain SVI’s operational and business profile amid a challenging operating environment over the past three years.
Small Size, Concentration Risk: SVI’s ratings are constrained by its narrow geographic coverage, its concentrated customer base, the likelihood of greater competition in the non-traditional EMS market, and technology risks associated with the electronics segment. Other constraints include its volatile working-capital requirement and exposure to foreign-exchange risk. However, this is partly offset by the purchase of forward contracts. In the medium term, we expect moderate organic growth for the company’s EBITDAR.
KEY ASSUMPTIONS
- A revenue drop in 2015 from capacity constraints, before a gradual increase from 2016
- An increase in working capital requirement to replace inventory and raw material damaged by the fire
- High capex in 2015 for replacement of machinery and production lines damaged in the fire
- Proceeds from insurance claims related to the fire are received in 2015
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- a substantial increase in net debt due to high dividend payouts; greater-than-forecast capex; or a large debt-funded acquisition leading to FFO-adjusted net leverage rising above 1.0x (end-2014: no debt) on a sustained basis.
- a decline in the operating EBITDAR margin to below 6% (2014: 10.4%) on a sustained basis,
- a weakening in the company’s market position, or loss of key customers.
Positive: Future developments that may, individually or collectively, lead to positive rating action include maintaining FFO-adjusted net leverage below 1.0x and FFO-adjusted leverage below 1.5x on a sustained basis, while achieving either:
- a substantial increase in scale, with revenue exceeding USD500m (2014: USD259m), and a broader diversification in the customer mix and geographical market coverage; or
- an improvement in operating EBITDAR margin to over 10% on a sustained basis.