Fitch Ratings (Thailand) Limited has affirmed The Siam Cement Public Company Limited's (SCC) National Long-Term Rating at 'A+(tha)' with Stable Outlook. The agency has also affirmed SCC's senior unsecured rating at 'A+(tha)' and National Short-Term Rating at 'F1(tha)'.
The affirmation of SCC's National Long-Term Rating with Stable Outlook reflects the company's solid medium-term credit profile, despite its aggressive capex and investments over the next 12-18 months, which we expect will lead to a temporary increase in funds flow from operations (FFO) net leverage to 3.8x in 2022, before reducing to below 3.5x in 2023 with the completion of its Long Son Petrochemicals (LSP) project in Vietnam.
KEY RATING DRIVERS
Strong EBITDA: Fitch expects SCC's EBITDA to rise to between THB70 billion-85 billion a year in 2021-2023 (2020: THB63 billion), following robust petrochemicals spread in 2021. We believe inorganic growth in packaging and recovery in the cement and building materials (CBM) businesses, as well as the commissioning of the LSP plant in 2023 will support SCC's EBITDA in 2022-2023, which will counterbalance weaker EBITDA at its chemicals business due to softer petrochemical spreads from rising global capacity.
Rising Capex: Fitch expects SCC's capex to be around THB210 billion over 2021-2023, which could temporarily drive FFO net leverage to beyond the 3.5x threshold for its 'A+(tha)' rating by end-2022 (end-September 2021: 2.9x), before reducing to 3.2x by end-2023. The deleveraging is likely to be supported by SCC's robust FFO of THB60 billion-70 billion a year in 2021-2023. The majority of capex will be spent on the LSP project in Vietnam.
Cement, Building Materials to Recover: Fitch expects SCC's CBM revenue and EBITDA to recover in 2022, following a decline in 2021 due to the Covid-19 pandemic and higher coal prices. The recovery will stem from increasing cement demand in Thailand and ASEAN as the pandemic eases and governments increase focus on infrastructure spending, while coal costs are also expected to fall. We also expect SCC to benefit from continued expansion in service solutions and retail sales of building products.
Rising revenue from high-value-added products and services, as well as its extensive cost-saving efforts should also support stronger cash flows.
Improving Diversification: We expect revenue from outside Thailand, from overseas plants and exports, to increase over the medium term, especially when cash flows from the LSP plant begin in 2023. The project will be the first and largest petrochemical complex in Vietnam, and we expect it to support local polymer demand, most of which is now met by imports. SCC also exports to countries outside ASEAN, which accounted for 16% of sales in 2020, and we expect these sales to be diverted outside of Vietnam once the LSP plant is operational.
Leading Market Positions: SCC has a leading market position in each of its core businesses, including cement, ceramic tiles, downstream chemicals (mainly polyolefins and polyvinyl chloride), and packaging paper in Thailand as well as in several ASEAN countries. SCC's leading position in each product and benefits from overall diversification help mitigate some sector-specific risks.
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)/Stable), in light of SCC's larger domestic cement market share, higher cash flow and greater geographic and business diversification. These strengths are mitigated by higher leverage than SCCC, driving only a one-notch higher rating for SCC.
SCC has a smaller chemicals business than PTT Global Chemical Public Company Limited (PTTGC, AA+(tha)/Negative, Standalone Credit Profile: aa-(tha)), Thailand's largest integrated refining and petrochemical operator. However, SCC has broader diversification across industries, which reduces its exposure to volatility in the chemicals industry. PTTGC's one-notch higher Standalone Credit Profile than SCC reflects its more conservative financial profile. However, PTTGC's leverage has risen following its recent debt-funded acquisitions and the Negative Outlook reflect the risks associated with its deleveraging capacity.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Consolidated revenue to rise by 33% in 2021 (2020: -8.7%, 9M21: +28%), thanks to strong chemicals and packaging performance and increasing contribution from retail building-products sales; continued revenue growth of 5%-10% a year in 2022-2023, supported by demand recovery in several product segments and capacity expansion;
- EBITDA margin to slightly soften to around 15% in 2021 (2020: 15.8%, 9M21: 15.5%), and to 13%-14% in 2022-2023, assuming lower chemicals spreads;
- Three-year capex and investment plan of THB210 billion (2021-2023).
- Dividend pay-out ratio of around 40%-50% in 2021-2023
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- 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.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO net leverage above 3.5x for a sustained period.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: SCC has THB92 billion of debt maturing within the 12 months to end-September 2022, including working-capital facilities from banks of around THB33 billion, term loans from banks of around THB4 billion and debentures of around THB55 billion. SCC's liquidity is supported by cash and Fitch-defined liquid investments of about THB65 billion as of end- September 2021, cash flow from operations of about THB60 billion a year and strong refinancing ability through the local debt-capital markets and bank funding.
We expect SCC to rely on external funding for liquidity over the next two years due to its large capex. However, the company has secured bank loans for its major committed projects. It had long-term undrawn committed credit facilities of THB90 billion at end-2020, including facilities for the LSP project of USD2.9 billion (around THB86 billion).
ISSUER PROFILE
SCC is one of Thailand's largest industrial conglomerates with EBITDA of THB76 billion in the year to end-September 2021. Its three core businesses are cement and building materials, chemicals and packaging. SCC holds the leading market position in all core products in Thailand and several ASEAN countries.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.