TRIS Rating upgrades the company rating on Sermsang Power Corporation PLC (SSP) to ?BBB+? from ?BBB?, with ?stable? outlook. The rating upgrade reflects a significant improvement in SSP?s financial profile.
The rating continues to reflect the high predictability of cash flows from SSP?s power portfolio, supported by long-term power purchase agreements (PPAs), low operational risk of solar power, and satisfactory performance of its power plants. On the contrary, the rating is constrained by the increasingly challenging renewable power industry, and a likelihood of heightening leverage in supporting the company?s growth plan.
KEY RATING CONSIDERATIONS
Solar power remains the core business
Solar power remains the centerpiece of SSP?s power portfolio although the company has expanded into wind and biomass power. As of June 2022, SSP?s power portfolio consisted of 19 power projects across Thailand and Asia, with a net capacity of 270 megawatts (MW) when measured in proportion to SSP?s ownership of the projects. Sixteen solar power projects accounted for 78% of total capacity while the remainder was across two wind power plants and one biomass power plant.
SSP?s power plants hold long-term PPAs, mainly with the Electricity Generating Authority of Thailand (EGAT), credible power buyers in Japan, and Vietnam Electricity (EVN). The PPAs are on a non-firm basis. The cash generation from solar power plants is highly predicable, characterized by the committed tariff and low operational risk.
A streak of satisfactory performance
Most of SSP?s power plants have shown stable performance. The annual output of most of the company?s solar power plants reached the P50 level (the 50% probability of energy production), the threshold of expected operating performance.
SSP?s solar power plants recorded satisfactory performance in the past three years, with an average capacity factor of above 15%. Solar power projects sold about 283 gigawatt hours (GWh) of electricity per year, 5.8% higher than the P50 level. Sermsang Palang Ngan Co., Ltd. (SPN), a 52-MW solar powerplant in Thailand, recorded outstanding performance compared to SSP?s other power plants. SPN sold about 85-91 GWh of electricity per year, which is 14% above the P50 level since it commenced operations in 2015.
Divestment of Hidaka solar project
In June 2022, SSP sold all its interests in the Hidaka project, a 21-MW solar power plant in Hokkaido. SSP sold its 87% stake for JPY2.8 billion, recognizing a financial gain of THB348 million. Added to that, the divestment removed the respective project loan of about JPY4.6 billion from SSP?s balance sheet. In effect, SSP?s debt fell drastically to THB6.6 billion as of June 2022, from THB9.4 billion as of 2021.
Strengthened capital structure
SSP?s capital structure significantly improved from last year, due in large part to a series of capital increases made in late 2021 and early 2022. In total, SSP received funds of THB1.58 billion from capital increases under private placement programs and warrant exercises. In addition, the gain from the Hidaka divestiture helped solidify SSP?s financial profile. In the first half of 2022, the ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) markedly declined to 2.7 times, from 4.5 times in 2021. SSP?s debt to capitalization ratio was 44.7% as of June 2022, marking a significant improvement from 59.7% in 2021.
Successful execution of nearshore wind farm
Over the past years, SSP has established a strong track record of developing solar and wind power projects. In October 2021, SSP successfully developed and commenced operation of a 48-MW nearshore wind farm in Vietnam. The project was considered very challenging, due to its complicated construction work and tight schedule. SSP managed to start commissioning of the wind project within the deadline imposed by the Vietnamese government while many developers faced significant delays in construction. Apart from greenfield projects, SSP also added to its portfolio of power generation capacity by acquiring a 25% stake in Winchai Co., Ltd. (Winchai) for about THB752 million in March 2022. Winchai owns and operates a 45-MW wind farm in Mukdahan, Thailand. Overall, SSP?s power portfolio has become more diversified and solid in cash generation.
Earnings growth from new projects
As a result of expansion, SSP?s electricity sales volume has constantly grown over the past three years. SSP sold about 400 GWh of electricity in 2021, up from 254 GWh in 2020. The increase in sales volume was mainly from the commencements of operation of new projects and full-year operations of preceding projects. In the first half of 2022, SSP mustered electricity sales of 289 GWh, a 63% increase from 178 GWh year-on-year (y-o-y). EBITDA came in at THB1.3 billion, a robust 38% increase y-o-y. We forecast SSP?s EBITDA will rise to a fresh record of THB2.8 billion in 2022.
Increasingly challenging power industry
We see growth opportunities for renewable power in Thailand as the government is bent on increasing the proportion of renewable energy, given its long-term goals to achieve carbon neutrality and net-zero greenhouse gas emissions. We expect the opening of a new quota for purchasing electricity from renewable energy sources. That being said, we hold the view that the domestic power market has become more challenging, with competition mounting in recent years. Private companies, ranging from very small entrepreneurs to large conglomerates, have branched into the power market. Meanwhile, demand for power is growing modestly after the pandemic-hit contraction. Added to that, the high excess reserve of capacity could set back the development of new power projects. We have seen Thai power companies leaning towards investments outside Thailand, in pursuit of higher returns and stronger electricity demand. However, some overseas expansions carry higher country risk stemming from transparency and consistency of regulations, the credit profiles of off-takers, and environmental challenges.
Leverage could rise from growth plan
Currently, SSP has committed to developing new projects including a 22-MW solar farm in Japan, and a pool of solar rooftop projects in Indonesia. However, we assume in our base-case projection that SSP could add 103 MW in new capacity on top of its committed projects. We expect SSP to further grow its footprint in Vietnam on the prospect of renewable power opportunities from the country?s upcoming Power Development Plan 8 (PDP8). In our base case, we expect new projects to commence commercial operations from 2024 onward.
In our base-case projection, we forecast SSP to spend around THB10 billion during 2022-2025. We assume most committed projects would be funded by project loans while top-up projects would obtain financing from the Engineering Procurement and Construction (EPC) contractors, whereby SSP will pay the construction costs a year after the projects are operational. Consequently, SSP?s debt could reach THB10.4 billion when the company starts to drawdown loans to pay EPC contractor in 2025.
We project SSP?s revenues to range from THB3-THB3.4 billion per year in 2022-2025, and EBITDA to hover around THB2.4-THB2.8 billion per year in the same period. The debt to EBITDA ratio will likely rise from the current level to 3.1-4.4 times. The debt to capitalization ratio should stay in the 45%-52% range.
Most of SSP?s power projects have already secured long-term project loans. SSP has also utilized both short-term and long-term banking facilities to support its subsidiaries. SSP and its subsidiaries have complied with respective financial covenants on their bank loans.
We assess SSP?s liquidity as adequate. As of June 2022, the company had THB1.2 billion in short-term and long-term debts coming due in the next 12 months. At the same time, it had cash on hand of THB5.1 billion while we expect funds from operations (FFO) of about THB2 billion.
As of June 2022, SSP had consolidated debt of about THB11.2 billion, excluding lease liabilities. Of this amount, THB9.2 billion was priority debt, comprising secured debt owed by SSP and all borrowings incurred by its operating subsidiaries. The priority debt to total debt ratio was 81%, far above the threshold of 50% according to TRIS Rating?s ?Issue Rating Criteria?. This suggests that SSP?s unsecured creditors are significantly disadvantaged to its priority debt holders with respect to claims against the company?s assets.
? The 22-MW solar farm in Shizuoka, Japan, to start operation in the fourth quarter of 2024.
? Top-up project to start operation for 48 MW in the first quarter of 2024 and 55 MW in the fourth quarter of 2025.
? A pool of 26-MW solar rooftops in Indonesia to gradually start operation in 2022-2023.
? Gross capacity to reach 480 MW in 2025.
? During 2022-2025, power plants to generate a combined power output of 515-718 GWh per year.
? Capital expenditure and investments to total THB10 billion during 2022-2025.
? SSP to obtain financing from the EPC contractors for construction of the top-up projects.
The ?stable? outlook reflects our expectations that SSP?s power plants will continue to run satisfactorily and generate cash flows as expected. We also expect the company to develop new projects as planned, without serious project delays or cost overruns. Despite ongoing expansions, we expect SSP to keep the level of cash flow against financial leverage within our forecast range.
A rating upgrade is unlikely in the near term. On the contrary, negative rating pressure would develop if SSP?s financial profile weakens considerably, which could occur from excessive debt-fund investments or a material underperformance of the power plants that results in deteriorating cash generation.
SSP was founded in 2015 as a holding company. SSP invests in companies that generate and sell electricity produced from renewable resources. The company was listed on the Market for Alternative Investment (MAI) in September 2017. SSP?s shares were moved to the Stock Exchange of Thailand (SET) in March 2019. In 2021, SSP issued 50 million new shares under a private placement for UOB Kay Hian Private Ltd. and Mr. Pongsak Thammatucharee. As of June 2022, SSP?s major shareholder was the Kraipisitkul family, which owns 52% of the company?s shares. Public shareholders owned the rest.
SSP?s first power plant was a solar power plant in Lopburi with an installed capacity of 52 MW. The plant was owned and run by its subsidiary, Sermsang Palang Ngan Co. Ltd. (SPN). SPN has a long-term PPA with EGAT for 40 MW of power. SPN receives an adder of THB6.5 per kilowatt-hour (kWh) for the first 10 years. SSP later expanded into solar rooftop projects and solar farms overseas, including Japan, Vietnam, Mongolia, and Indonesia.
In Thailand, SSP owns a 5-MW solar farm, which it co-developed with the War Veterans Organization of Thailand (WVO). The project receives a fixed feed-in-tariff (FiT) of THB4.12 per kWh. The term of the PPA is 25 years. Apart from solar farms, SSP also has solar rooftop projects with many industrial users under private PPAs. The electricity tariffs charged to industrial users are based on the time of use (TOU) tariff minus a discount, as specified in the PPAs.
SSP also has several operating solar farms overseas. The company has three solar farms in Japan, with total gross capacity of 68 MW. These three projects receive a FiT of JPY36 per kWh under 20-year PPAs with reputable off-takers in Japan, such as Kyushu Electric Power Co., Inc. (KYUDEN). SSP also owns the Khunsight Kundi solar farm project, a 16-MW solar farm in Mongolia. This project has a 12-year PPA with National Dispatch Center LLC. The tariff is a FiT basis of US cent16.2 per kWh. SSP also owns a 50-MW solar farm in Vietnam. EVN is the off-taker for this project under a 20-year PPA. The tariff is a fixed FiT basis of US cent9.35 per kWh.
In July 2021, SSP acquired a 100% share of UPT. UPT owns and operates a 9.9-MW biomass power plant in Nakorn Ratchasima, Thailand. UPT commenced operation in May 2019 and sells power to the Provincial Electricity Authority (PEA) under a 20-year PPA. The PPA carries a fixed FiT of THB2.39 per kWh and a variable FiT, which is linked to the core inflation rate. PPAs also carry a premium FiT of THB0.3 per kWh for the first eight years. In October 2021, SSP?s 48-MW nearshore wind farm in Vietnam commenced its operation. In March 2022, SSP invested in a 25% shares in Winchai wind farm through Qian Xing Long Co., Ltd. (QXL), adding net capacity of 11 MW to SSP?s power portfolio.
Currently, SSP is developing a 22-MW solar farm in Shizuoka, Japan, and a number of solar rooftop projects in Indonesia. SSP?s gross capacity will reach 377 MW when all committed projects in the pipeline start operations in 2024.
- Corporate Rating Methodology , 15 July 2022
- Key Financial Ratio and Adjustments for Corporate Issuers, 11 January 2022
Sermsang Power Corporation PLC (SSP)
Company Rating: BBB+
Rating Outlook: Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: firstname.lastname@example.org, Tel: +66 0 2 098 3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2022, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient?s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at www.trisrating.com/rating-information/rating-criteria