Bangkok--24 Jul--Fitch Ratings
Fitch Ratings (Thailand) has affirmed Eastern Polymer Group Public Company Limited's (EPG) National Long-Term Rating and the senior unsecured debt rating at 'A-(tha)'. The Outlook is Stable.
The affirmation reflects our belief that EPG's operating cash flow will remain fairly stable, despite the current economic downturn, supported by its leading position in a niche product for which there are diversified end uses. EPG's credit profile is also cushioned by its solid financial profile with net leverage expected to remain less than 1.0x over the next few years, which is supported by minimum expansionary capex and healthy free cash-flow generation.
EPG's automotive parts and accessories business is likely to face challenges due to weaker demand in 2020 caused by the coronavirus pandemic, with a gradual recovery in 2021-2022. However, the more measured impact on its thermal insulation and food and beverage plastic packaging businesses is likely to mitigate the weaker demand in the automotive business. Fitch expects the company to be able to largely maintain its EBITDA margin at around 14%-15% in the next two years through active reduction in operating costs stemming from higher efficiency in its new plants by way of a lower workforce, as well as falling feedstock costs in line with global crude oil prices.
KEY RATING DRIVERS
Slower Automotive Sector Revenue: Fitch expects EPG's revenue in the year ending March 2021 (FY21) to drop by 17%, due mainly to weakness in the automotive business. In a revenue breakdown by business, we expect automotive parts and accessories to drop by 25% in FY21 and thermal insulation and packaging businesses by 10%. The pandemic caused a temporary suspension in automotive manufacturers' operations in Thailand, US and Europe between March and May, which disrupted earnings.
We expect the recovery in demand for automotive parts and accessories to pre-pandemic levels to take two to three years, whereas the demand recovery for thermal insulation and packaging should be quicker. The thermal insulation business recovery is supported by construction activities starting again after lockdowns were lifted globally, although a second wave of coronavirus infections and further lockdowns remain a risk. The packaging business' recovery is supported by resilient demand for food and beverages.
Manageable Profitability: Fitch expects the EBITDA margin to remain at around 15% in FY21 despite lower revenue. This is supported by lower operating costs via higher efficiency from new plants in Thailand and the US, and a smaller workforce with automated systems. Polymer costs, which contribute 30% to 55% of total production costs, are also likely to remain low as the price has been pressured by oversupply of petrochemical feedstock and low crude oil prices.
Strong Financial Profile: EPG's credit metrics are sound for its rating. Its net leverage - measured by funds from operations (FFO) net leverage - is likely to remain below 1.0x in FY21-FY23, while we project FFO fixed-charge coverage to range from 7x to 12x. Operating cash flow is likely to cover usual capex. However, EPG has flexibility to reduce capex, if needed, as capex is mainly for efficiency improvements, such as increasing robotic production.
Niche Market Position: EPG is a manufacturer of polymer and plastic automotive parts and accessories for utility trucks, and the leading manufacturer 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 market position.
EPG is also the global market leader in ethylene propylene diene monomer (EPDM) rubber insulation, although the synthetic rubber insulation market is dominated by nitrile butadiene rubber (NBR) insulation, which accounts for around 90% of the market. EPG's EPDM accounts for about 8%-11% of global market share. NBR has been in the market far longer, and is more widely used and priced lower than EPDM.
Business Diversification: EPG has a diverse source of revenue from its three businesses - automotive parts and accessories (46% of total revenue in FY20), thermal insulation (30%), and food and beverage plastic packaging (24%). 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 50%-60% of its automotive parts and accessories to leading global automakers as an original design manufacturer (ODM) and OEM, while the rest is sold to automobile dealers in Thailand and another 100 countries under its own brand. About 30% of its thermal insulation sales is in Thailand, of which half is 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 is sold in Thailand, of which about 40% is to leading food and beverage companies.
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, likewise 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, which offset EPG's smaller operating scale. Both companies have low financial leverage, with FFO net leverage of below 1.0x. Therefore, they have the same ratings.
EPG can be compared with KCE Electronics Public Company Limited (A-(tha)/Negative), 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. The Negative Outlook on KCE reflects the evolving risk from the pandemic, which may prolong the recovery in its revenue and profitability to beyond 2022.
EPG has larger operating scale than JWD InfoLogistics Public Company Limited (BBB(tha)/Negative), one of the dominant players in full-service inland logistics services in Thailand. JWD has higher revenue visibility on a part of its business, supported by a concession and medium- to long-term contracts, but EPG has more geographical and end-product diversification, which compensates. Their customers are also diversified by industry. The Negative Outlook on JWD reflects its challenges in deleveraging due to ongoing high investment amid the economic downturn. EPG has much stronger credit metrics and hence, it has a higher rating.
KEY ASSUMPTIONS
Revenue to drop by about 17% in FYE21 due to the downturn in the automotive business with auto manufacturers' operations suspended between March and May, while other businesses are affected to a lesser extent from the pandemicRevenue recovery of 10% during FY22-23 supported by resilient demand in thermal insulation and packaging business, and ramp-up of new production linesOperating EBITDA margin of about 14%-15%Capex to total about THB1.9 billion in FY21-FY2370% dividend pay-out ratio
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgradeWe do not expect positive rating action in the next 24 months due to EPG's smaller operating scale compared with higher-rated peersFactors that could, individually or collectively, lead to negative rating action/downgradeLower cash flow or higher investments than Fitch expects, leading to FFO net leverage sustained above 1.5xDeterioration of EBITDA margin below 13% for a sustained period
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: EPG's liquidity is supported by its cash and cash equivalents of THB1.3 billion as of end-FY20. Debt maturing over the 12 months from March 2020 amounts to THB1.0 billion, of which about 89% is short-term debt used mainly for working capital. EPG had available uncommitted working-capital facilities of THB5.2 billion at end-FY20. Fitch expects the company to be able to roll over its short-term debt, supported by a healthy credit profile.