Bangkok--4 Sep--Fitch Ratings (Thailand)
Fitch Ratings (Thailand) Limited has today affirmed the National Long-term ‘BBB+(tha)’ rating of Vanachai Group Public Company Limited’s (“VNG”) secured debentures No.1/2003 due 2008. The debentures No.1/2003 are secured by assets of VNG’s wholly-owned subsidiary, Vanachai Panel Industries Company Limited.
VNG’s creditworthiness is based on its well-established market position domestically, as well as its high level of production integration via the production of glue and forward expansion into value-added products which helps support margins. The rating is also supported by the strong industry outlook which is driven by growing local and regional consumer demand for wood-based panels. Nonetheless, VNG faces continued margin pressure from rising raw materials and in-land transportation costs from higher rubber wood and oil prices over the past three years. The margin pressure continued to impact VNG’s EBITDAR generation from late 2004 to H106, offsetting ongoing sales growth from capacity addition in mid-2004. VNG’s EBITDAR margins declined to 26% in 2005 from 35% in 2004. EBITDAR margin further declined to 23% in H106, although it has been improving on a quarterly basis thanks to the trend of rising particle board (“PB”) prices seen since the beginning of 2006.
Other key credit risks include the excess supply of PB and medium density fibreboard (“MDF”), which has resulted in intensified price competition domestically and regionally, as well as the current THB appreciation which negatively impacts VNG’s USD export revenue. Additionally, global high oil prices, if prolonged, could further impact the domestic and regional economic growth outlooks, undermining demand prospects for wood-based panels over the medium-term.
Due to weaker operating performance, debt-funded investment for a new MDF line and a high dividend payout, VNG’s net debt to last-twelve-months EBITDAR increased to 3.4x at end-H106 from 2.8x in 2005 and 2.0x in 2004. While its net debt to EBITDAR ratio is likely to peak in the range of 4.0x to 4.5x in 2006, the expected stronger EBITDAR growth following the introduction of the MDF line in late 2006, together with a more moderate capital expenditure plan, should help improve VNG’s financial leverage to be more consistent with the current rating metric by end-2007.
VNG and its subsidiaries are Thailand’s major producers and distributors of MDF and PB, with total capacities of 270,000 cubic meters per year (cu.m./y) and 900,000 cu.m./y, respectively. In H106, domestic sales accounted for 40% of sales revenue, while export sales, mainly to China, South Korea and Southeast Asia, contributed to the remainder. VNG is 58%-owned by the founding Sahavat and Jareonnawarat families.
Contact: Wasant Polcharoen, Soamsiri Chadavadh, Vincent Milton; Bangkok, Tel: +662 655 4755.