Bangkok--20 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has assigned Eastern Polymer Group Public Company Limited's (EPG, A-(tha)/Stable) proposed senior unsecured debentures of up to THB800 million due 2023 a National Long-Term Rating of 'A-(tha)'. The proceeds of the debentures will be used to refinance part of its existing bank loans and fund capex and investments.
The proposed debentures are rated at the same level as EPG's National Long-Term Rating because they represent unconditional, unsecured and unsubordinated obligations of the company. Fitch believes the notes' structural subordination is limited as we expect EPG's secured and prior-ranking debt/EBITDA to remain below 2.0x in the medium term. EPG's secured debt/last-12-month EBITDA was 1.0x at end-September 2019.
KEY RATING DRIVERS
Niche Market Position: EPG's rating reflects its leading position as a manufacturer of polymer and plastic automotive parts and accessories for utility trucks, and a producer of disposable rigid plastic packaging for food and beverage in Thailand. EPG pioneered a no-drilling installation technology for truck-bed liners, helping the company become the market leader in truck-bed liners in Thailand. EPG is also the first manufacturer to produce a patented double-shell acrylonitrile butadiene styrene (ABS) alloy canopy used on pick-up trucks. ABS is the only plastic acceptable to original equipment manufacturers (OEM), giving EPG a first-mover advantage, which supports its leading position.
EPG is also a major global producer of ethylene propylene diene monomer (EPDM) rubber insulation, which is used for heating, ventilating and air-conditioning, piping and refrigeration systems. EPDM is a niche product and accounts for 8%-10% of the global market in synthetic rubber insulation.
Strong Financial Profile: Fitch expects EPG's FFO adjusted net leverage to remain less than 1.0x over the medium term, which is strong for its rating. Low leverage is supported by manageable capex, which can be scaled back based on demand. We also expect EPG to generate positive free cash flow over the same period in line with its record.
Business Diversification: EPG has a diverse source of revenue from its three businesses - automotive parts and accessories (50% of total revenue in the year ended March 2019 (FY19)), thermal insulation (27%), and food and beverage plastic packaging (23%). This has helped to mitigate sector-specific risks such as the cyclicality of the automotive and construction industries, as well as the low barriers to entry and intense competition of the food and beverage plastic-packaging industry. EPG has synergy benefits from its businesses in terms of raw-material sourcing and R&D as the raw materials for all its businesses are polymer and plastic compounds.
Diversified Customer Base: EPG sells about 50%-60% of its automotive parts and accessories to leading global automakers as an original design manufacturer and OEM, while the rest are sold to automobile dealers in Thailand and another 100 countries under its own brand. About 30% of its thermal insulation sales are in Thailand, of which half are directly to construction projects. EPG has production plants in the US and China to support its offshore sales, and has licensed two plants in Russia and India to make its products. About 90% of its rigid plastic-packaging products are sold in Thailand, of which about 40% are to leading food and beverage companies.
Feedstock Price Volatility: EPG is vulnerable to fluctuations in raw-material prices, mainly polymers and plastic beads such as high-density polyethylene, ABS, polypropylene, polystyrene and polyethylene terephthalate (PET). These polymer prices are driven by their petrochemical feedstock prices, which are determined largely by oil prices. Fitch expects crude oil prices to moderate in the next few years, which mitigates risks to margins. However, EPG is able to pass on some of the rising costs to customers over time if polymer prices rise as its automotive parts and accessories, and thermal insulation products have few competitors.
Moderate Sales Growth: Fitch expects EPG's sales to increase at a mid-single-digit rate over the medium term, supported by continuing growth in the automobile, construction, and food and beverage industries. Nevertheless, we expect its EBITDA margin to be flat in FY20, and thinner than those in FY16-FY17, due mainly to weak margins in its plastic-packaging business.
DERIVATION SUMMARY
EPG's business profile is moderate relative to Thai national peers, but its financial profile is stronger. EPG operates in the polymer and plastic-product business, similar to Polyplex (Thailand) Public Company Limited (PTL, A-(tha)/Stable), one of the 10 largest PET film producers in the world by output, although they are in different end-user segments. EPG's operations are less geographically diversified, but serve more end-user segments. Its EBITDA margin is also comparable with that of PTL. Both companies have low financial leverage, with FFO adjusted net leverage of below 1.0x. The ratings are, therefore, the same.
EPG's business and financial profiles are comparable with those of KCE Electronics Public Company Limited (A-(tha)/Stable), one of the world's top-10 automotive printed circuit board producers (PCB) 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. EPG has greater diversification among its customers and end-users. KCE generates higher EBITDA and EBITDA margins, but both companies have low financial leverage with FFO adjusted net leverage of less than 1.0x.
EPG has larger operating scale than JWD InfoLogistics Public Company Limited (BBB(tha)/Stable), one of the dominant players in full-service inland logistics services in Thailand. JWD has higher revenue visibility, supported by a concession and medium- to long-term contracts, but EPG has more geographical diversification. Their customers are also diversified by industry. EPG has stronger credit metrics, while JWD has a large investment plan in 2018-2019, which has driven its leverage higher. As a result, EPG has a higher rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue growth at 4%-5% per annum
- Operating EBITDA margin to remain flat in FY20 (FY19: 14.3%) and gradually recover in FY21-FY22
- Capex and investment to decline to about 5% of total revenue on average (FY19: 6.8%)
- Dividend payout of 70%-75% of net income (FY19: 71%)
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A substantial increase in operating scale that enhances its market position further and improves its business profile while maintaining FFO adjusted net leverage below 1.5x
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Lower cash flows or higher investments than Fitch expects, leading to FFO adjusted net leverage that is above 2.0x on a sustained basis
- Deterioration of EBITDA margin to below 13% on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: EPG relies on short-term funding, but Fitch believes its liquidity is manageable. The liquidity is supported by its cash and cash equivalents of THB773 million at end-FY19. It has debt maturing over the next 12 months from March 2019 of THB1.3 billion, of which about 83% is short-term debt mainly used for working capital. EPG had about THB4.5 billion in available working-capital facilities, although uncommitted, from financial institutions at end-FY19. Fitch expects the company to be able to roll over its short-term debt, supported by its low financial leverage and healthy business risk profile. We expect the company to repay some of its short-term working-capital debt with its proposed debenture issuance, which further supports liquidity.
Additional information is available on www.fitchratings.com