Fitch Rates WHA Utilities First-Time #BBB+(tha)#; Outlook Negative

Stocks and Financial Services Press Releases Thursday July 20, 2017 14:05
Bangkok--20 Jul--Fitch Ratings

Fitch Ratings (Thailand) Limited has assigned WHA Utilities and Power Public Company Limited (WHAUP) a National Long-Term Rating of 'BBB+(tha)'. The Outlook is Negative. At the same time, the agency has assigned a 'BBB+(tha)' National Long-Term Rating to WHAUP's senior unsecured debentures of up to THB4 billion due in 2020. The proceeds of the debentures will be used to refinance some of WHAUP's existing bank loans.

WHAUP has a robust business profile, and Fitch expects the company's operating cash flow to increase from growing customer's demand and an increase in predictable dividends from its stakes in power projects. However, we expect WHAUP's financial leverage to remain moderate in the medium term as its capex and investments are likely to remain high during the period. WHAUP's 'BBB+(tha)' final rating with Negative Outlook is constrained by the rating of its ultimate parent, WHA Corporation Public Company Limited (WHA, BBB+(tha)/Negative), due the strong linkages between the two companies.

The senior unsecured debentures are rated at the same level as WHAUP's National Long-Term Rating. This is based on Fitch's expectation that the company's future debt will be on an unsecured basis, rather than on a secured basis as its existing bank loans are. Under the bank loan agreement, the bank agreed to release all the security pledged for the secured loans before the company issues the debentures.


Strong Business Profile: WHAUP benefits from its low business risk, reflecting the limited competition in its market and its recurring income from long-term contracts. The relatively stable demand of its customers helps underpin predictable and recurring revenue, while operating margin should remain stable due to the cost-plus tariff, which allows the company to pass on cost increases to its customers. WHAUP is the sole provider of essential water services to industrial users in industrial estates and industrial lands operated by its major shareholder - Hemaraj Land and Development Public Company Limited (Hemaraj).

Earnings Growth: Fitch expects WHAUP's revenue to increase strongly in 2017 and 2018. This is mainly supported by additional demand for water from the commissioning of new small power producers (SPPs) in the service area and an increase in tariff during the period. Demand growth should also be supported by likely strong sales of industrial land in Hemaraj's industrial estates in 2017; these new tenants will also be the customers of WHAUP for water services.

Higher Dividend from JV: Fitch expects WHAUP will receive higher dividends from its partly owned power companies of THB1.2 billion-1.3 billion a year in 2017 and 2018 (2016: THB657 million). This is supported by the commissioning of new power projects, in which WHAUP has minority stakes, during the period. Fitch views dividends from these investments as relatively predictable, as most of their revenues are secured by long-term power purchasing agreements with the state power utility company - Electricity Generating Authority of Thailand.

Some Volume Risk: WHAUP's revenue is exposed to some volume risk due to the lack of a minimum off-take requirement with customers. A decrease in water usage, due to changes in customers' production activities, could lead to lower revenue and earnings. However, Fitch believes the risk is manageable as WHA has a diversified customer base and we expect the majority of WHAUP's customers, which are petrochemical companies, to have relatively stable demand. Over the past six years, total volume of water sales and wastewater treatment increased steadily yoy with the exception of 2015, when volume decreased slightly by 0.7%. Overall, volume has grown by a healthy 4.0% CAGR since 2010.

High Investment; Moderate Leverage: Fitch expects WHAUP's free cash flow to be negative in 2017 and 2018, due to high investment during the period. Funds flow from operations (FFO) of around THB1.6 billion a year is unlikely to cover capex and dividend payment during the period, although growth in FFO should help the company to maintain its FFO-adjusted net leverage at a moderate level of around 3.8x-4.4x over the next three years.

Rating Constrained by Parent: WHAUP's strong operational and moderate financial profile warrant a higher standalone rating of 'A-(tha)'. However, its National Long-Term rating reflects its strong operational and strategic linkages with its ultimate parent, WHA, which has a lower rating of 'BBB+(tha)' and Negative Outlook. WHAUP's ratings are constrained by those of WHA as per Fitch's Parent and Subsidiary Rating Linkage criteria. The strong linkages are based on WHA's controlling stake in WHAUP and ability to exert influence over WHAUP's business, financial policy, and overall strategic and investment decisions.


WHAUP's business profile is strong relative to Thai national peers. Its earnings and operating cash flow profiles are close to those of Bangkok Aviation Fuel Services Public Company Limited (A+(tha)/Stable), which operates aircraft refuelling services at Thailand's major airports; Global Power Synergy Public Company Limited (A+(tha)/Stable), a medium-sized power and stream generator; and BTS Group Holdings Public Company Limited (A(tha)/RWN), the operator of the skytrain network in Bangkok. These companies have highly predictable and stable earnings due to low competition, stable demand or recurring income from long-term contracts. However, the 'A-(tha)' standalone rating of WHAUP is lower than those of its peers due to WHAUP's relatively weaker financial leverage.

WHAUP's ratings are constrained by the rating of its ultimate parent, WHA, which has a weaker credit profile and lower rating of BBB+(tha) with Negative Outlook, given the strong linkages between the two entities. The strong linkages are based on WHA's controlling stake in WHAUP, and ability to exert influence over WHAUP's business, including voting rights at shareholders' meetings, election of directors, dividend payments and overall strategic and investment decision.

Fitch's key assumptions within our rating case for the issuer include:
  • Revenue from water business to increase strongly by around 19%-22% a year in 2017 and 2018, supported by demand growth and tariff increases
  • EBITDAR margin of around 41% in 2017 and 2018
  • Dividends from its stakes in power projects of around THB1.2 billion-1.3 billion a year in 2017 and 2018
  • Capex of THB500 million-600 million a year in 2017 and 2018 and commitments to inject equity into its partly owned power projects of THB1.5 billion in 2017 and THB313 million in 2018
  • Investment in new utilities and power businesses of around THB4 billion-5 billion over 2017-2021
  • 40% dividend payout ratio, except for 2017 where there will be no dividend payment.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • Positive rating action on WHA provided linkages between WHA and WHAUP remain intact
  • Weaker linkages between WHA and WHAUP provided that the standalone rating of WHAUP remains intact.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • Negative rating action on WHA provided linkages between WHA and WHAUP remain intact
For the ratings of WHA, the following sensitivities were outlined by Fitch in its rating action commentary of 18 April 2017:
Developments That May, Individually or Collectively, Lead to Positive Rating Action:
  • The consolidated FFO-adjusted leverage at below 5.5x on a sustained basis.
Developments That May, Individually or Collectively, Lead to Negative Rating Action:
  • An aggressive investment, high dividend payment or weaker-than-expected revenue and EBITDA margin resulting in a consolidated FFO-adjusted leverage unlikely to decrease to below 5.5x from 2018 onwards.

Manageable Liquidity: At end-2016, the company had total debt of THB10.5 billion, of which the THB2.5 billion short-term portion was repaid after the company received the proceeds from its initial public offering in April 2017. The company also plans to issue new debentures in 3Q17 to refinance some bank loans.

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