Fitch Upgrades Thailand's PTTGC to 'AA(tha)'; Outlook Stable

Stocks and Financial Services Press Releases Monday June 17, 2013 08:37
Bangkok--17 Jun--Fitch Ratings

Fitch Ratings (Thailand) Limited has upgraded PTT Global Chemical Public Company Limited's (PTTGC) rating and its senior unsecured debentures to National Long-Term 'AA(tha)' from 'AA-(tha)'. The Outlook is Stable. Its National Short-Term rating has been affirmed at 'F1+(tha)'.

The upgrade results from Fitch's decision to upgrade the stand-alone credit profile of PTTGC to AA-(tha) from A+(tha) previously. This follows the company's stronger than expected operating cash flow generation, strong forecast credit metrics and Fitch's view that the company can maintain a financial profile appropriate for its elevated rating level despite potential for higher capital expenditure.

Key Rating Drivers

Headroom for expansionary capex: Fitch believes the current low financial leverage (FFO net adjusted debt of 1.4x in 2012) and strong operating cash generation provide reasonably good headroom for a large capital expenditure programme within the current ratings. The committed capex of THB60bn to be made during 2013-2017 can be comfortably managed with its operating cash generation. PTTGC has a further USD4.5bn (THB135bn) capex under consideration over this period, although such uncommitted spending can be deferred if market conditions weaken to preserve its financial profile.

Strong cash flow generation: Fitch expects PTTGC's funds from operations (FFO) to continue to be strong at over THB50bn per year to FY17. Its cash flow generation is supported by high plant utilisation and margin improvement projects, despite a weak refining and petrochemical industry outlook. The projects are expected to add to the company's margins through to 2017 based on investments undertaken during this period. Some benefits from these programmes were already evident in its financial results for 2012 and Q113.

Maintaining low leverage: Fitch expects PTTGC's FFO adjust net leverage to be around 1.5x in 2013, and over the next three years if taking into account both committed and uncommitted capex. This figure can, however, improve materially to below 1.3x if the company only undertakes currently committed capex. The company has strong liquidity with cash and cash equivalents of THB56bn as of end-March 2013 and also benefits from a well-spread debt maturity profile.

Stable and high margins: PTTGC has the most stable cash flow generation and highest margins among domestic refining and petrochemical peers. These are supported by its olefins chains business (at about 60% of PTTGC's EBITDA and with EBITDA margin of around 27% in 2012). The strong margins have been made possible by its low-cost gas-based production and, importantly, a profit-sharing pricing arrangement with major shareholder PTT Public Company Limited (PTT) which reduces margin volatility in times of changing market conditions.

Fully integrated producer: PTTGC's ratings are underpinned by its position as Thailand's largest fully integrated petrochemical and refining company. The company has a wide product range and benefits from its large operating scale. Furthermore, PTTGC benefits from competitive feedstock costs as most of its feedstock for olefins is natural gas, which is available domestically and cheap relative to alternative feedstock, such as naphtha, that is being used by its competitors.

Linkage with PTT: PTTGC's rating benefits from a one-notch uplift to its standalone credit profile, reflecting its strategic importance to and operational links with PTT (49% ownership, AAA(tha)/Stable). PTTGC is PTT's major off-taker of both gas products and condensate, and leads the petrochemical business expansion domestically and internationally within the PTT group. PTTGC is the largest earnings contributor to PTT among its downstream affiliates. The rating uplift has been limited to a single notch as some of the benefits from its association with parent, such as the gas supply arrangements, are reflected in its strong standalone profile.

Highly cyclical business: PTTGC's credit profile is tempered by its vulnerability to the highly cyclical petrochemical sector and fluctuations in refining margins and crude oil prices resulting in volatile margins and operating cash flow generation.

Rating Sensitivities
Positive: Future developments that may, individually or collectively, lead to positive rating action include
  • evidence of stronger ties with PTT
  • a positive rating action on the company's standalone rating is unlikely in the medium term given PTTGC's large capex plans and long lead times in cash generation from these investments
Negative: Future developments that may, individually or collectively, lead to negative rating action include