Bangkok--11 Aug--Fitch Ratings
Fitch Ratings (Thailand) Limited has today affirmed SVI Public Company Limited’s (SVI) National Long-term rating at ‘BBB+(tha)’ and National Short-term rating at ‘F2(tha)’. The Outlook on the National Long-term rating is Stable.
SVI’s ratings reflect the company’s niche position in the electronic manufacturing service (EMS) sector. The company’s focus is on the growing non-traditional end-product segment, such as industrial control systems, high-end telecommunication equipment and medical devices, which are less volatile, offers higher-margins, and over the past few years has helped SVI improve its operation and business profile notwithstanding the challenging operating environment. SVI’s ratings also factor in the long-term growth prospects for the non-traditional EMS market, driven by ongoing end-market demand and an increasing trend of original equipment manufacturing outsourcing orders to EMS manufacturers.
SVI’s ratings are also underpinned by the company’s strong financial position, including a net cash position of THB975m and a low total adjusted debt to last-12-month EBITDAR ratio of 0.3x at end-Q109. Although the high dividend payout following the current management buyout is likely to result in an increase in SVI’s net debt and financial leverage, Fitch only expects a limited impact on SVI’s credit protection metrics due to the company’s solid financial profile.
Despite its strong financial profile, SVI’s ratings are constrained by various qualitative factors, including its narrow geographic coverage, its concentrated customer mix, and a likely high level of competition in the non-tradition EMS market going forward, in addition to technology risks associated with the electronic segment. Other key concerns include SVI’s volatile working capital requirements, which could affect its operating cash flow and financial position, and its exposure to foreign exchange risk, as almost all of its operating cash flow is US dollar and euro-denominated, while its debt is mainly in Thai baht. However, this is partly mitigated by the purchase of forward contracts.
The Stable Outlook reflects the expectation that SVI will maintain a strong profit margin, generate strong cash flow to support its capex and dividends, and keep its financial profile and liquidity position consistent with the current credit rating. However SVI’s ratings could be negatively affected by a substantial increase in net debt due to high dividend payouts and/or large capex which results in an adjusted net debt to EBITDAR ratio of more than 1.0x on a sustained basis. Other negative rating factors would include a significant decline in margins, a notable deterioration in its market position and the loss of some of its major customers. Conversely, the ratings could be positively impacted by a substantial expansion in the company’s scale, including greater diversification in terms of customer mix and geographic market, and at the same time the company’s EBITDAR margin rising above 10% on a sustained basis.
In May 2009, MFG Solution Company Limited (MFG), which is wholly-owned by SVI’s chief executive officer, purchased a 58.5% stake in SVI from H&Q Asia Pacific, a private equity fund, thereby becoming its major shareholder with a current stake of 62.9%. MFG financed this transaction using a THB1.8bn credit line from Kasikornbank Public Company Limited (KBANK). MFG indicated that it will mainly use the dividend payout from SVI and/or the proceeds from sales of SVI shares to repay the loan from KBANK. While this is likely to result in an increase in SVI’s net debt and financial leverage, the management buyout has also alleviated concerns over the shareholding structure and should improve management incentives to continue to run the company soundly.
Contacts: Obboon Thirachit, Bangkok, +662 655 4757; Pimrumpai Panyarachun, +662 655 4752; Vincent Milton, +662 655 4759.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
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