TRIS Rating Assigns “BBB/Stable” Rating to Senior Unsecured Debt Worth Up to Bt3,000 Million of “SGP”

TRIS Rating has assigned the rating of “BBB” to the proposed issue of up to Bt3,000 million in senior unsecured debentures of Siamgas and Petrochemicals PLC (SGP). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of SGP at “BBB”. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance SGP’s existing debts and for working capital.

The ratings continue to reflect the company’s strong position as the second-largest liquefied petroleum gas (LPG) distributor in Thailand, its robust domestic distribution network, and its geographically diverse customer base. The ratings, however, are partially offset by higher business risk from SGP’s operations abroad which expose the company to fluctuations in LPG prices.

The “stable” outlook reflects the expectation that SGP will be able to maintain its strong position as the second-largest LPG distributor in Thailand. Reliable cash flows from LPG operations in Thailand will partly alleviate the volatile margin of overseas operations.

The ratings may be revised downward if SGP’s financial profile deteriorated materially for an extended period. This could arise if the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage or funds from operations (FFO) to total debt ratio significantly fall below TRIS Rating’s expectation or large debt-funded acquisitions. The rating, however, would be revised upward if the performance is strong than the base case on a sustained basis.

SGP was established by the Weeraborwornpong family in 2001, and was listed on the Stock Exchange of Thailand (SET) in 2008. As of September 2015, the Weeraborwornpong family remained the largest shareholder, holding 61% of the company’s shares.

SGP’s business profile in Thailand is strong. The company has remained the second-largest LPG distributor in Thailand. Its operations in Thailand cover LPG trading under the “Siam Gas” and Unique Gas” brands which held about 23.5% market share, by LPG trading volume, behind PTT PLC (PTT) which had 37.5% market share as of September 2015. SGP’s distribution network is considered strong, supported by seven LPG storage terminals and a sizeable number of filling and service stations. SGP also owns land and sea freight transportation facilities which support its operation in Thailand. The company’s LPG trading activities in Thailand have generated solid cash flows over the past five years. However the company’s earnings have declined due to the economy slowdown and intense competition in the automotive segment.

The ratings also take into consideration SGP’s competitive advantages in overseas markets. SGP entered overseas markets in 2010. The company established its LPG trading business in China, Vietnam, Singapore and Malaysia, and operates off-shore trading in East Asia. The company owns two large storage caverns in China, capable of storing 300,000 tonnes of LPG, and a 45,000 deadweight tonnage (DWT) of floating storage in Singapore to support its off-shore trading operations. The trading operation outside of Thailand provides benefits of geographical diversification and growth opportunities. However, the company’s business risk has increased materially due to greater exposure to the price volatility of LPG in the global market.

SGP’s sales revenue for the first nine months in 2015 was Bt41,598 million, an 8.5% drop year-on-year (y-o-y), reflecting a fall in trading volume in Thailand and a downtrend of Saudi Aramco Contract Price for LPG (CP). SGP’s international operations comprise about 60% of total revenue. The operating margin improved to 3.5% for the first nine months of 2015, thanks to less fluctuation in the CP price.

During 2016-2018, TRIS Rating expects that SGP’s trading operations in Thailand will generate adequate cash flow to cushion the LPG price risk inherent in the international operations. The CP price in September 2015 hit a six-year low, before rebounding to approximately US$460 per tonne in December 2015. The low CP price favors SGP’s overseas operation as the company needs less working capital and the downside risk of further drop in the LPG prices is limited.

TRIS Rating’s base case expects that SGP’s revenue to grow by 5%-10% per year in medium term, driven by an increase in overseas trading volumes. The overseas trading segment will contribute approximately 60% or more of total revenue over the next three years. The debt to capitalization ratio is expected to stay below 55% since the company has no material capital expenditures in the foreseeable future. SGP’s liquidity profile is expected to be adequate, backed by Bt18,000 million credit facilities and expected the FFO ranging of Bt1,500-Bt1,700 million per annum. The EBITDA interest coverage ratio is expected to stay above five times. The FFO to total debt ratio should bounce back to 10%-15%.

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