Bangkok--26 Jul--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed the National Long-Term Rating and the senior unsecured rating of The Siam Cement Public Company Limited (SCC) at 'A+(tha)'. The Outlook on the National Long-Term Rating is Stable.
At the same time, Fitch has assigned the company's new senior unsecured debentures of up to THB10 billion due 2022 a National Long-Term Rating of 'A+(tha)'. Proceeds from the issue will be used to refinance existing debt. 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.
KEY RATING DRIVERS
Leverage to Rise; Within Expectations: Fitch expects SCC's FFO adjusted net leverage to rise to 2.0x-3.0x over the next three years from a low level of 1.9x at end-1Q18. The increase will be driven by heavy capex, but the forecast leverage remains below the 3.0x level at which Fitch would consider negative rating action. The company revised some uncommitted investment plans so that total capex will remain at THB250 billion-260 billion over the next five years, instead of increasing after acquiring the remaining 29% stake in the Long Son Petrochemicals (LSP) project from Vietnam Oil and Gas Group and expanding capacity at its Map Ta Phut Olefins Cracker (MOC) through debottlenecking.
High Capex: Fitch expects SCC's annual capex and investment to increase to about THB50 billion-75 billion over the next three years, from below THB40 billion in 2016-2017. The LSP and MOC projects account for 70%-75% of SCC's five-year capex plan. Although Fitch believes that the company has some flexibility to adjust its uncommitted investments, a significant increase in capex and investment beyond Fitch's expectation could have a negative rating impact.
Improving Diversification in CBM: Cement and building materials (CBM) operations in ASEAN increased to about 21% of total revenue in 2017, from 14% in 2014. Fitch expects the segment's share of revenue to rise to 25%-30% over the medium term. The CBM expansion 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 additional supply coming on stream, which will put pressure on profit margins over the next couple of years.
Well-Diversified Businesses: SCC's ratings are 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.
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)/Negative) 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, which mainly reflects 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, which reduces exposure to volatility in the chemicals industry. However, PTTGC has a more conservative financial profile, resulting in a higher rating.
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-75 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 during the normal run of business, or above 3.0x during a business expansion phase.
LIQUIDITY
Manageable Liquidity: SCC's liquidity is supported by cash and liquid investments (Fitch defined) of about THB61 billion at end-March 2018, 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-March 2018, total debt was THB204 billion, almost 90% of which was baht-denominated senior unsecured debentures. About 29% 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 affirmed at 'A+(tha)'; Outlook Stable
-- National Short-Term Rating affirmed at 'F1(tha)'
-- National Long-Term Rating on senior unsecured debentures affirmed at 'A+(tha)'
-- National Long-Term Rating on new senior unsecured debentures of up to THB10 billion assigned at 'A+(tha)'