The upgrade reflects an improvement in TASCO's financial profile following debt reduction and improved profitability. TASCO's leverage has improved more quickly than expected due to the fall in global crude oil prices, which resulted in a lower working capital requirement and stronger profitability.
KEY RATING DRIVERS
Stronger Credit Metrics: Fitch expects TASCO's credit metrics to strengthen in the medium term as a result of high product margin as asphalt prices have fallen more slowly than crude intake costs, crude oil prices have declined, and product demand has been steady. This would help TASCO to deleverage more quickly than previously expected. The agency revised its forecast for the company's funds from operations (FFO) to THB3.0bn-4.0bn a year and FFO-adjusted net leverage to below 3.1x in 2015-2017, from THB1.0bn-1.5bn a year and 5x-6x, previously.
Strong Domestic Market Position: TASCO is the market leader in Thailand's asphalt business, with a domestic market share of about 40% in asphalt cement sales and more than 60% in sales of asphalt premium products. This is due to its strong marketing network, reliable delivery and solid technical support. TASCO's key competitive advantages over its local and regional peers are a long track record in the asphalt business, technical knowledge and access to a global market network through its 32% shareholder, France-based Colas SA.
Geographic Diversification: TASCO operates 18 manufacturing plants in five countries in the Asia-Pacific region, including an asphalt refinery in Malaysia. About 64% of sales are outside Thailand - its five major markets are Indonesia, China, Australia, Malaysia and Vietnam, and it has sales in more than 10 other countries. International sales are also supported by its ownership of nine vessels, resulting in competitive logistic costs and a flexible delivery schedule.
Exposure to Volatile Oil: TASCO is vulnerable to fluctuations in the prices of raw materials- mainly crude oil - although its asphalt product prices are not correlated with the movement of crude oil prices in the short term. The long lead time of transporting crude from South America to its asphalt refinery in Malaysia exposes TASCO to a mismatch between refined product prices and crude oil prices. However, the company partly mitigates crude oil price risk by using hedging tools to protect its margins.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- crude oil prices of USD55 per barrel in 2015, USD65 per barrel in 2016, and USD80 per barrel from 2017 onwards;
- target proportion of asphalt cement to premium asphalt sales volume at 90:10;
- asphalt margin to increase in 2015, and gradually decline to a normal level in 2017;
- dividend payout ratio at 35%-40%;
- capex of THB1.0bn-2.0bn a year in 2015-2017.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained rise in leverage (as measured by FFO-adjusted net leverage) above 4.0x due to large debt-funded investments, thin industry margins or crude oil prices sustained at above USD100 per barrel
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A significant increase in operating scale or revenue diversification that helps improve its business profile
- FFO-adjusted net leverage of below 2.0x on a sustained basis