Bangkok--27 Apr--Fitch Rating
Fitch Rating (Thailand) Limited has assigned Polyplex (Thailand) Public Company Limited (PTL) a National Long-Term Rating of 'A-(tha)'. The Outlook is Stable.
The rating reflects PTL's leading position in the polyester film business, with production capacity that matches those of global producers. The company is geographically diversified, which enhances its competitiveness and market position. This is counterbalanced by the inherent volatility of the sector in which PTL operates. The rating also captures PTL's strong financial profile, which is characterised by its low leverage.
KEY RATING DRIVERS
Leading PET Film Producer: The rating on PTL, which is also based on the consolidated financial profile of its parent Polyplex Corporation Limited (PCL), reflects its leading position in the polyester film business. The consolidated operations of PCL (known as Polyplex Group) are one of the 10 largest biaxially oriented polyethylene terephthalate (BOPET) film producers in the world by output, with market share of about 5% in thin PET film market.
Polyplex Group's production capacity is comparable with those of the global producers, such as Toray, Mitsubishi and Dupont-Teijin. However, specialty films make up a smaller share of Polyplex Group's portfolio compared with its competitors. The 10 biggest producers account for about 46% of the PET market by output.
Geographically Diversified Operations: PTL has three manufacturing facilities in three key markets - Asia, North America and Europe; its plants are located in Thailand, Turkey and the United States. PTL plans to add another production facility in Indonesia in 2019. A geographically diversified production base mitigates the seasonal demand in different continents and operational risk resulting from disruptions at one of its manufacturing plants. The proximity of production facilities to its markets also helps reduce logistics costs and the impact from trade barriers, particularly in the net import regions like North America and Europe.
Well-Diversified Customer Base: PTL's sales are well distributed among its key three regions of Asia, North America and Europe, supported by its marketing network and production bases in the regions. Its sales to the industrial sector increased to about 44% of total sales in the fiscal year ended March 2017 (FY17), which reduced its high concentration in the flexible packaging business. PTL serves about 1,600 customers globally, with its top 10 customers accounting for about 29% of total sales in FY17. PTL and parent PCL have been in the polyester film business for more than 15 years.
High Product Cyclicality: PTL is exposed to the cyclical polyester film business. Moreover, the company has limited pricing influence because the majority of its products are standard films that are commodities and face high competition. Standard films account for 70%-75% of PTL's total annual sales. Nevertheless, PTL has increased value-added products, including metalised film and coated film, and expanded sales to specialty flexible packaging to reduce the impact from cycles in commodity thin films. PTL also produces other substrate films, such as cast polypropylene (CPP) and blown polypropylene (blown PP) films, as well as thick PET films, to widen its product range and customer base.
Volatile Feedstock Prices: PTL is vulnerable to fluctuations in raw-material prices - mainly purified terephthalic acid (PTA) and mono ethylene glycol (MEG). PTA and MEG prices are driven by their petrochemical feedstock prices, which are largely driven by oil prices. Although PET film prices tend to move in tandem with raw material prices, they are also driven by demand and supply of PET films. The PET film market is oversupplied. Large new capacities in 2011-2016 have substantially hurt polyester film producers, reducing the industry's operating rates and margins. Pressure from the oversupply eased slightly in 2017, and Fitch believes the trend is likely to continue in 2018.
Volume to Drive Earnings: Fitch expects PTL's sales volume to grow at a single digit rate in FY18-FY19, supported by growth in demand from flexible packaging and industrial applications. The new capacity in Indonesia will drive the company's sales volume growth in FY20-FY21 to double digits, although we expect some delays associated with the ramp-up in production. Fitch expects PTL's EBITDA margin to reduce to 17%-18% in FY19-FY20 (9MFY18: 18.3%) due to increasing raw material prices and pressure from oversupply in the polyester film business.
Strong Financial Profile: Fitch expects PTL's financial leverage, measured by EBITDAR adjusted net leverage, to increase to 1.0x-1.3x in FY19-FY20 due mainly to higher capex. However, the leverage is likely to remain low. PTL's credit metrics have improved substantially for the past two years due to improving operating cash flows and an equity injection in FY16. Its EBITDAR adjusted net leverage decreased to about 1.0x by end-December 2017 from 6.4x at FYE15. Its current low financial leverage should provide headroom for the company to manage any decline in product margins and support new investments.
Linkages with Parent: Fitch views that PTL has moderate linkages with PCL, and PTL's standalone credit profile is stronger than its parent's standalone profile, as assessed under Fitch's Parent and Subsidiary Rating Linkage criteria. PTL and PCL have set clear guidelines on operations and target markets to avoid potential conflict and overlapping, and address concerns of the minority shareholders of PTL. However, their senior management personnel overlap, and PTL is strategically important to PCL as its main earnings generator. PTL's National Rating is based on PCL's consolidated financial profile, which has been adjusted to include 100% of PTL to take into account of the sizeable minority shareholders in PTL.
DERIVATION SUMMARY
PTL's business profile is moderate relative to Thai nationally rated peers, but its financial profile is stronger. PTL's business and financial profiles are comparable with those of KCE Electronics Public Company Limited (KCE, A-(tha)/Stable), one of the world's top 10 automotive printed circuit board (PCB) producers by revenue. KCE operates in a higher-risk industry, component electronics, but this is offset by KCE's focus on the niche segment of automotive PCB, which has higher barriers to entry. PTL has more geographically diversified operations and a diversified customer base. KCE generates higher EBITDA margin, but both companies have low financial leverages with total adjusted net debt to EBITDAR of below 1.5x. The ratings are, therefore, the same.
Compared with Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable), the largest asphalt producer in Thailand and the leading player in ASEAN, PTL has more geographically diversified operations and a diversified customer base. However, TASCO has more operating sites in seven countries in Asia and competition in the asphalt business is less than that in the PET film business. Both companies also have low financial leverages. So, PTL's rating is equal to TASCO's rating.
Compared with IRPC Public Company Limited (A-(tha)/Stable, standalone credit profile of BBB+(tha)), PTL has significantly smaller operating scale, as IRPC is a fully integrated oil refining and petrochemical producer. Nevertheless, PTL has more geographically diversified operations, which mitigate its concentration in the PET film business. PTL's products are used in downstream applications, with an increasing proportion of value-added products to help reduce the impact from the cyclical nature of commodity thin films. PTL also has lower financial leverage, which results in a higher rating than IRPC's 'BBB+(tha)' standalone credit profile. IRPC's National Long-Term Rating incorporates a one-notch uplift to take into account its moderate linkages with its single largest shareholder, PTT Public Company Limited (AAA(tha)/Stable).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- FY18 forecast is largely based on performance in 9MFY18;
- Revenue growth of about 5% in FY19 driven mainly by volume growth and about 10% in FY20 from the start of operations in Indonesia plant;
- Operating EBITDA margin of 17%-18% in FY19-FY20 (9MFY18: 18.3%). Weakened margin to reflect higher raw material prices and pressure from oversupply;
- Capex to total about THB3.8 billion in FY19-FY21;
- Dividend payout of 40% of net income.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A significant increase in operating scale or substantial increase in specialty product sales resulting in higher and more stable profit margin, while maintaining total adjusted net debt to EBITDAR below 1.5x, although both are unlikely over the next 12 to 18 months.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Lower cash flows or higher debt-funded investments than Fitch expects, leading to total adjusted net debt to EBITDAR of PCL (a full consolidation of PTL) above 2.0x on a sustained basis
- Deterioration of EBITDA margin to below 13% on a sustained basis
LIQUIDITY
Manageable Liquidity: Fitch views PTL's liquidity as manageable. The liquidity is supported by its cash on hand of THB1.4 billion at end-December 2017. Debt maturing over the next 12 months from December 2017 amounts to THB2.1 billion, of which about 78% is short-term debt mainly used for working capital. PTL has working-capital facilities, although uncommitted, from financial institutions of about THB2 billion. Fitch expects the company to be able to roll over its short-term debt, supported by its low financial leverage.