Bangkok--30 Jan--Fitch Ratings
Fitch Ratings (Thailand) has revised The Siam Cement Public Company Limited's (SCC) Outlook to Negative from Stable. The agency has also affirmed SCC's National Long-Term Rating and senior unsecured rating at 'A+(tha)' and its National Short-Term Rating at 'F1(tha)'.
At the same time, Fitch has assigned a National Long-Term Rating of 'A+(tha)' to the company's proposed senior unsecured debentures - No.1/2563 - of up to THB25 billion due 2024. The proceeds will be used to refinance maturing debentures. The notes are rated at the same level as SCC's National Long-Term Rating as they constitute direct, unsecured, unconditional and unsubordinated obligations of the company, and because of the debentures' low structural subordination on account of SCC's limited secured- and prior-ranking debt.
The Negative Outlook reflects elevated risks associated with SCC's high leverage. Fitch expects weaker cash flow from the chemicals business and a high committed capex plan over the next three years to result in funds from operations (FFO) adjusted net leverage staying above 3.0x, a level that is no longer consistent with its rating in its expansion phase. An equity-raising plan via an IPO of subsidiary SCG Packaging Public Company Limited, which was filed with the Thai Securities and Exchange Commission in December 2019, can alleviate the pressure on SCC's leverage profile during the period of heavy committed capex and return the company's leverage profile to the parameters of its rating. The success of the IPO and SCC's use of the proceeds, in terms of directing cash to debt repayment or re-investment in the business, will determine the pace of deleveraging.
KEY RATING DRIVERS
Weaker Cash Flow from Chemicals: The decline of the chemicals business has been more severe than we expected. SCC's FFO is likely to drop to around THB50 billion-THB55 billion a year against our previous expectation of THB60 billion-THB65 billion a year in 2020-2021 (2018: THB63 billion) as the division was affected by the US-China trade war. We expect the weakness in the chemicals business to be offset by its cement and building materials (CBM) and packaging businesses. Consequently, we expect revenue and EBITDA to rise by around 3%-4% in 2020.
A mild improvement in the CBM industry and increasing contribution from the expansion in its packaging business cushioned the impact from the chemicals downturn in 9M19 as EBITDA fell 19% yoy. The company's chemicals performance remained weak in 4Q19 due to a compressed product spread. We expect demand to gradually recover as global trade tensions ease and crude oil prices drop over the next three years, but its chemicals EBITDA margin will remain pressured by increasing supply, particularly polyolefin products.
Leverage to Stay High: Fitch expects SCC's FFO adjusted net leverage to stay above 3.0x in 2020-2022 (end-9M19: 2.9x) due to high committed capex of around THB175 billion over 2020-2023. The majority of the capex will be spent on the Long Son Petrochemicals project in Vietnam, which will not generate cash inflow until 2023. The elevated leverage could be reduced by the receipt of the IPO proceeds if the company directs the funds to the repayment of debt.
Well-Diversified Businesses: SCC's ratings are supported by both product and geographical diversity of its core CBM, chemicals and packaging businesses. This helps to mitigate some sector-specific risks. SCC has benefitted from the diversification, which has smoothed out the cash flow in several years, including the current chemicals downturn as the impact was partly mitigated by the growth of its packaging business. Strong domestic cement demand compensated for the previous trough in petrochemicals demand in 2011-2012, and the shrinking cement earnings over 2015-2018 were offset by the upturn in the chemicals segment and the expanding packaging business.
SCC has diversified its footprint across ASEAN countries for all its key businesses and Fitch expects SCC's revenue generation from the region to increase to 20%-25% over the medium term (2018: 15%). This rise will be supported by gradual improvement in regional cement operations and expansion of the packaging business in ASEAN. SCC also exports to global markets, which accounted for 24% of total sales in 9M19.
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 such as polyolefins and polyvinyl chloride, and packaging paper in the domestic market and several ASEAN countries.
Product Cyclicality: The ratings also take into account SCC's inherent exposure to the cyclicality of the chemicals business. Furthermore, SCC has limited ability to influence the pricing of many of its products in light of their commoditised nature as prices are determined by global demand and supply.
DERIVATION SUMMARY
SCC has a stronger business profile than its closest peer in Thailand's building-materials sector, Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), in light of SCC's larger domestic cement market share. SCC's stronger business profile, taking into account the company's significantly larger operating scale and diversification across various businesses, warrants the one-notch higher ratings. This is despite SCC's slightly higher leverage. The leverage profiles of both SCC and SCCC are pressured by weakened operating cash flow with heavy investment, reflected by their Negative Outlook.
SCC has a smaller chemicals business than 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. However, SCC has broader diversification across industries, which reduces its exposure to volatility in the chemicals industry. Nevertheless, 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
- Consolidated revenue to increase by 3%-4% in 2020, mainly from CBM and packaging while we expect revenue from the chemicals business to drop.
- Consolidated revenue growth to pick up to 7%-10% a year in 2021-2022, supported by demand growth in its segments and capacity expansion.
- EBITDA margin to decline to 12%-13% in 2019-2021 (2018: 14%)
- Five-year capex (mainly committed plan) of about THB250 billion (2019-2023)
- Dividend payout ratio of 40%-50% in 2019-2021 (2018: 50%)
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- The rating Outlook could be revised to Stable if SCC's FFO adjusted net leverage can be sustained at around 3x during 2020-2022 on a projected basis, provided it has stronger-than-expected operating cash flow or cash inflow from the equity injection.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A weakening of the company's business or financial profile resulting in FFO adjusted net leverage at above 3.0x during a business expansion phase, or above 2.0x for a sustained period during the normal run of business.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: SCC's liquidity is supported by cash and Fitch-defined liquid investments of about THB31 billion at end-September 2019, cash flow from operations of about THB50 billion a year, and strong refinancing ability through local debt-capital markets and bank funding. SCC's liquidity over the next two years is likely to rely on external funding because of its large capex. However, SCC has secured bank loans for its major committed projects.
Total debt was THB216 billion at end- September 2019, 84% of which was Thai baht-denominated senior unsecured debentures. About 30% of total debt will mature in the next 12 months.
Additional information is available on www.fitchratings.com