Fitch Ratings has affirmed Thailand-based Siam City Cement Public Company Limited's (SCCC) National Long-Term Rating at 'A(tha)', its National Short-Term Rating at 'F1(tha)' and the National Long-Term Rating on its senior unsecured debentures at 'A(tha)'. The Outlook is Stable.
SCCC's ratings reflect the company's business profile as a small regional cement manufacturer with a solid market position in its core operating markets. It is the second-largest cement producer in Thailand and south Vietnam, and the largest cement producer in Sri Lanka.
SCCC is likely to maintain its sound financial profile and consistent free cash flow (FCF) generation through the cycle. Fitch expects EBITDA net leverage to improve to around 2.0x 2024, from 2.3x in 2023 and 2022, supported by an improvement in operating cash flows as working-capital pressure recedes.
KEY RATING DRIVERS
Muted EBITDA Recovery: We expect SCCC's EBITDA to remain muted at THB6.5 billion-7 billion in 2023 (2022: THB6.9 billion), as the earnings recovery in Thailand will be offset by weakening EBITDA from Vietnam and Sri Lanka. We forecast low- to mid-single-digit revenue growth for SCCC in the next two years as the economy recovers, mainly in Thailand. Its EBITDA margin is likely to remain under pressure at around 12%-13% in 2023 (2022: 13.7%; 2021: 17.9%) as price increases are unlikely to fully cover the rise in energy costs in the last 12 months.
However, we believe SCCC's margins will continue to benefit from cost-management initiatives in the next few years, such as forward contracts to lock in the prices and volume of key manufacturing inputs, fixed-cost optimisation, reduced clinker usage and an increase in alternative fuels.
Uneven Recovery Across Markets: The bulk of SCCC's cash flow is from Thailand, with Vietnam and Sri Lanka accounting for most of the remainder. We expect cement demand in Thailand to be supported by the recovery in public infrastructure projects after the pandemic, with demand for private-sector construction activity also improving on the economic recovery. Continued price increases by major cement producers in Thailand should also support better profitability in 2023.
We expect the stronger cement demand in Thailand to be offset by challenges in Vietnam, where tighter bank credit growth to the real-estate sector and a regulatory crackdown on local-currency bond issuance are causing a slowdown in residential real estate, which will weigh on cement demand in the next 12-18 months. SCCC's Sri Lankan earnings are also likely to deteriorate significantly in 2023, as demand will slump amid the weak domestic economy, although the ban on clinker imports and resultant industry shortage will continue to support SCCC's sales volume in the country.
Moderate Capex: Capex for 2023 is likely to drop to around THB1.6 billion (2022: THB1.9 billion), mainly for maintenance and cost rationalisation, including committed projects for clinker factor reduction in Thailand and Vietnam. SCCC is also planning to expand its production capacity, although it has not made a commitment and the investment is unlikely to start before end-2023. We believe SCCC will employ a prudent capital-preservation strategy and not undertake any large capacity expansion or acquisitions before leverage falls below its negative rating sensitivity of 2.3x.
Improving Leverage; Positive FCF: Fitch expects SCCC's EBITDA net leverage to remain flat at 2.3x in 2023 and reduce to 2.0x in 2024, as net debt will fall due to easing working-capital outflows on a moderation in revenue growth. Leverage rose to 2.3x in 2022 from 2.1x in 2021, driven by higher energy costs and working-capital requirements as revenue jumped 20% from post-pandemic pent-up demand. SCCC has been generating positive FCF in the last few years, barring a dip in 2022, and we expect FCF to remain positive over the next few years.
Market Position, Geographical Diversification: SCCC has defended its market position as Thailand's second-largest cement producer against increasing supply and heightened competition over the past few years due to its strong brand and pricing flexibility. The company's market position in Sri Lanka as the largest domestic manufacturer and sole clinker producer and its position as south Vietnam's second-largest operator widen its geographical diversification. Revenue from regional operations and exports accounted for nearly 50% of 2022 revenue.
DERIVATION SUMMARY
SCCC has a weaker business profile than its closest domestic industry peer, The Siam Cement Public Company Limited (SCC, A+(tha)/Negative), given SCC's leading domestic market position and diversification across geographies and businesses. SCC's stronger business profile warrants a one-notch higher rating, notwithstanding SCCC's lower leverage.
SCCC is rated at the same level as the Standalone Credit Profile (SCP) of SCG Packaging Public Company Limited (SCGP, A+(tha)/Negative; SCP: a(tha)), a leading producer of paper-based packaging in south-east Asia, but higher than the SCP of Global Power Synergy Public Company Limited (GSPC, A+(tha)/Stable; SCP: a-(tha)), Thailand's major private power-generation company.
SCCC's cash flow is more susceptible to economic downturns than that of SCGP and GPSC because of exposure to construction and real estate end-markets. SCGP operates in more defensive sectors that support steady cash flow and underpin its higher leverage threshold than SCCC for the same rating. GPSC's high leverage following its aggressive debt-funded investments constrains its SCP at one notch below SCCC's rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to increase by around 2%-5% a year in 2023-2024, supported by increasing product prices and demand recovery in Thailand.
- EBITDA margin to stay at around 12%-13% in 2023-2024
- Capex of THB3.6 billion over 2023-2024
- Dividend payout ratio of 75%-85%
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- We do not expect an upgrade in the medium term given SCCC's smaller operating scale than that of higher-rated peers.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- A significant weakening in operating cash flow, a large debt-funded investment or dividend payment to shareholders, resulting in EBITDA net leverage increasing to above 2.3x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Healthy Liquidity: SCCC had THB2.6 billion in debt maturing in 2023. Its liquidity is supported by cash on hand of THB3.4 billion and available committed revolving credit facilities of around THB9 billion at end-2022. The company also has strong refinancing ability, supported by its robust access to local debt-capital markets and bank funding.
ISSUER PROFILE
SCCC has total cement capacity of 25.3 million tonnes per annum (mtpa) in its plants in Thailand, Sri Lanka and south Vietnam. SCCC also owns a 40% stake in a joint-venture cement producer in Cambodia with clinker capacity of 1.7mtpa.
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.
Additional information is available on www.fitchratings.com