กรุงเทพฯ--9 ก.พ.--Fitch Ratings
Fitch Ratings (Thailand) Limited has upgraded the National Long-Term Rating and the senior unsecured rating of The Siam Cement Public Company Limited (SCC) to 'A+(tha)' from 'A(tha)'. The Outlook is Stable.
At the same time, Fitch has assigned the company's new senior unsecured debentures of up to THB30 billion due 2022 a National Long-Term Rating of 'A+(tha)'. The debenture proceeds will be used to refinance existing debt and fund the company's capex and investments. The notes are rated at the same level as SCC's National Long-Term Rating as they constitute the direct, unsecured, unconditional and unsubordinated obligations of the company. A full list of rating actions is at the end of this commentary.
The rating upgrade reflects the benefits of having diverse businesses from cement and building materials (CBM) to chemicals, and its financial profile improvement. The strength of the chemicals business, combined with lower capex, has led to a significant financial profile improvement over the last few years. Fitch expects this to be maintained, and should the company commit to a large chemicals investment, we believe the 'A+(tha)' rating can accommodate a continued strong credit profile with a leverage peak at around 3x.
KEY RATING DRIVERS
Decrease in Leverage: Fitch expects SCC to maintain its FFO adjusted net leverage at below 2.8x over the medium term. SCC's strong cash flow generation from a robust performance in chemicals and a delay in capex in 2017 resulted in a lower FFO adjusted net leverage of 1.9x at end-2017. Its current low financial leverage and our expectations of continued strong operating cash flow will provide a cushion for its high investment plan of THB180 billion-190 billion over the next three years, mainly for the Long Son Petrochemicals (LSP) project in Vietnam. In the absence of high capex, its leverage should remain strong at about 2.0x.
Improving Diversification in CBM: SCC's 2017 revenue contribution from CBM operations in ASEAN increased to about 21% of total revenue from the CBM business, from 14% in 2014. Fitch expects the contribution to be in the range of 25%-30% over the medium term. The expansion in the CBM business in ASEAN was completed by 1Q17, resulting in total cement capacity outside Thailand of 10.5 million tonnes per annum, or 31% of its current total capacity. However, Fitch also expects fiercer competition in ASEAN countries, due to planned additional supply coming on stream, to put pressure on profit margins over the next couple of years.
Well-Diversified Businesses: SCC's ratings are also supported by the diverse sources of revenue from its core businesses - CBM, chemicals, and packaging - which have helped smooth its operating cash flow and mitigate some sector-specific risks. Strong cement demand in the domestic market compensated for the previous trough in petrochemicals in 2011-2012 and the upturn in chemicals over the past three years has more than offset the weak domestic demand for cement.
Leading Market Position: SCC is one of Thailand's largest conglomerates. Its ratings are underpinned by its leading market position in its core products. SCC has the largest capacity and market share in cement, ceramic tiles, downstream chemicals (polyolefins and PVC), and packaging paper in the domestic market and several south-east Asian countries. Fitch expects SCC to generate EBITDA of THB65 billion-75 billion a year with margins of 14%-15% in 2018-2019. The chemicals business is likely to remain a key earnings contributor in 2018, as the recovery in the CBM business is likely to be slow.
Rising Capex: Fitch expects SCC's capex and investment cost to increase to about THB50 billion-70 billion a year over the next three years, from below THB40 billion in 2016-2017. We expect the capex for the CBM and packaging businesses to drop but capex for the chemicals business is likely to surge due to our expectation that the LSP project will start in 2018 and consume capex up to 2022. Fitch considers the LSP project's spending and debt as part of SCC, despite its 71% stake, as we expect SCC to provide full support for the project.
However, in the case of a significant further delay or cost overruns in the LSP project, Fitch expects the company to make rational investment decisions according to the project's feasibility.
Product Cyclicality: The ratings also take into account SCC's inherent exposure to the cyclicality of the chemicals business. Furthermore, SCC lacks pricing influence because commodities form the bulk of its products and their prices are determined by global demand and supply.
DERIVATION SUMMARY
SCC has the strongest business profile relative to its peers in Thailand's building materials sector, including Siam City Cement Public Company Limited (SCCC, A(tha)/Stable) and Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable). SCCC and TASCO both have a single business, and SCCC has a lower market share in the domestic cement market than SCC. SCC has a higher rating than the other two companies, given comparable financial profiles, due to its significantly larger operating scale and diversification across various businesses. Compared with PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile of AA-(tha)), the largest integrated refining and petrochemical operator in Thailand, SCC has a smaller chemicals business but it has broader diversification across industries to lower the exposure to chemicals volatility. However, PTTGC has a more conservative financial profile.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to grow at about 4% in 2018 largely from the chemicals business, and about 7% in 2019, driven by the CBM and chemicals businesses
- EBITDA margin to drop to 14%-15% in 2018-2019
- Capex of THB50 billion-65 billion a year in 2018-2019
- Dividend payout ratio of 40%-50% in 2018-2019
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
We do not expect positive rating action unless there is a significant profit contribution from the overseas expansion of its chemicals business, for instance, from the full operation of the LSP project in Vietnam.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A weakening of the company's business and financial profile resulting in FFO adjusted net leverage sustained at above 2.0x for a normal run of business, or above 3.0x during a business expansion phase.
LIQUIDITY
Comfortable Liquidity: SCC's liquidity is supported by cash and liquid investments (Fitch defined) of about THB58 billion at end-December 2017, strong cash flow from operations of above THB55 billion a year, and strong refinancing ability through local debt-capital markets and bank funding. At end-December 2017, total debt was THB209 billion, of which 87% was baht-denominated senior unsecured debentures. About 31% of total debt will mature in the next 12 months.
FULL LIST OF RATING ACTIONS
The Siam Cement Public Company Limited
-- National Long-Term Rating upgraded to 'A+(tha)' from 'A(tha)'; Outlook Stable
-- National Short-Term Rating affirmed at 'F1(tha)'
-- National Long-Term Rating on senior unsecured debentures upgraded to 'A+(tha)' from 'A(tha)'
-- National Long-Term Rating on new senior unsecured debentures amounting to THB30 billion assigned at 'A+(tha)'