Bangkok--10 Mar--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Siam City Cement Public Company Limited's (SCCC) National Long-Term Rating at 'A(tha)', senior unsecured rating at 'A(tha)', and National Short-Term Rating at 'F1(tha)'. The ratings have been removed from Rating Watch Negative (RWN). The Outlook is Stable.
The rating action reflects Fitch's expectation that SCCC will maintain its financial leverage consistent with an 'A(tha)' rating over the medium term, after the capital injection plan of THB17 billion in 2Q17 has been completed. Fitch has factored in this capital injection as we believe SCCC's major shareholders have a strong commitment to support the planned capital-raising. The capital increase represents the company's commitment to maintain low financial leverage, despite aggressive expansion.
We expect SCCC's funds from operations (FFO)-adjusted net leverage to decline to 2.5x-3.0x in 2017-2018 and to below 2.5x in 2019. The equity funding should help to reduce pressure on SCCC's post-acquisition leverage and allow the company to deleverage to levels that are commensurate with the 'A(tha)' rating in the next two years. However, headroom for the company's further debt-funded acquisitions is limited.
KEY RATING DRIVERS
Benefits from Increasing Diversification: Fitch expects SCCC's broader geographical diversification to help reduce the risk of single-market concentration. SCCC has aggressively expanded its regional footprint through greenfield investment in Cambodia and acquisitions in Bangladesh, Sri Lanka, and Vietnam over the past year. The revenue contribution outside Thailand will grow significantly to above THB20 billion in 2017, from THB6 billion in 2015, representing almost 50% of total revenue.
Strong Market Position: SCCC is Thailand's second-largest cement producer, with a stable market share of 27%-28% based on sales. SCCC has defended its market position against capacity expansion and heightened competition in its domestic market over the past two years, with its strong brand and its relatively wide profit margin, which provides some pricing flexibility. The market position of the entities acquired is also strong, with market shares (by sales volume) of 39% in Sri Lanka and about 20% in southern Vietnam in 2016.
Recovery in Profitability: Fitch expects SCCC's EBITDA margin to recover to 22%-23% in 2017-2018, supported by improvement in local cement demand and EBITDA contribution from the new business in Vietnam. Intense competition in the domestic market and lower-margin contribution from Bangladesh operations narrowed SCCC's EBITDA margin to 20% in 2016, from 23%-24% in 2014-2015. We see Thai cement demand improving only slightly in 2017 due to a delayed demand recovery in- the residential and commercial segments. We expect stronger growth in 2018.
Vulnerable to Energy Prices: SCCC's EBITDA margin is highly sensitive to coal and electricity energy costs, which account for more than 70% of total production costs. Fitch expects average coal prices in 2017 to be higher than in 2016, given expected lower supply in China.
DERIVATION SUMMARY
SCCC is the second-largest cement producer in Thailand. It has a weaker business profile, in terms of size, domestic market position, and diversification, than its closest peer in the cement industry, The Siam Cement Public Company Limited (SCC, A(tha)/Positive). However, SCC generally has higher financial leverage than SCCC. The investments of SCCC could drive its FFO adjusted net leverage higher, although it is likely to be sustained below 2.5x over the medium term.
Compared with another building material company, Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable), SCCC has a stronger business profile. TASCO, a leading asphalt producer in Thailand, has lower operating cash flows and narrower profitability than SCCC, particularly after SCCC's recent acquisitions. SCCC's stronger business profile more than offsets the company's higher financial leverage relative to that of TASCO. In addition, TASCO is vulnerable to fluctuations in the prices of raw materials, mainly crude oil.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
-- Equity-raising of THB17 billion to be completed by 2Q17;
-- Domestic cement sales to grow slightly in 2017 and improve more solidly in 2018;
-- Total revenue to grow by about 40%-50% in 2017 after acquisitions of the Siam City Cement (Lanka) and Holcim (Vietnam) Limited;
-- EBITDA margin at 22%-23% in 2017-2018;
-- A dividend payout ratio of about 60% in 2017-2018.
RATING SENSITIVITIES
POSITIVE: Developments that may, individually or collectively, lead to a positive rating action include:
-- An increase in operating scale or stronger EBITDA margin that help improve SCCC's business profile while maintaining FFO-adjusted net leverage below 1.5x on a sustained basis. However, we do not expect any positive rating actions over the next 18-24 months, given the company's currently high leverage.
NEGATIVE: Developments that may, individually or collectively, lead to negative rating action include:
-- A significant weakening of profit margins, or a large debt-funded investment, leading to FFO-adjusted net leverage above 2.5x on a sustained basis.
LIQUIDITY
Large Refinancing Required: SCCC had THB21 billion of debt maturing within the next 12 months as of end-2016, including a short-term bridge loan for acquisitions. The company expects to refinance the debt with equity and debt issuance. Refinancing risk should be low, given the company's strong shareholders and a track record of debt capital market access.