Fitch Rates Siam Cement's New Debentures 'A(tha)'

Tuesday 15 August 2017 17:51
Fitch Ratings (Thailand) Limited has assigned a National Long-Term Rating of 'A(tha)' to The Siam Cement Public Company Limited's (SCC, A(tha); Positive) new THB35 billion unsecured and unsubordinated debentures. The debentures will be issued in two tranches - No.2/2560 with amount of THB10 billion due 2024 and No.3/2560 with amount of THB25 billion due 2021.

The proceeds will be used to refinance maturing debentures and fund future capex and investments. The notes are rated at the same level as SCC's National Long-Term Rating as they constitute direct, unsecured, unconditional and unsubordinated obligations of the company.

KEY RATING DRIVERS

Leverage Profile Remains Intact: Fitch expects SCC to maintain its FFO adjusted net leverage at below 2.8x, despite the higher-than-expected investment in the Long Son Petrochemicals (LSP) project. The company's operating cash flow generation in 1H17 was in line with our expectation. Its current low FFO adjusted net leverage of 2.0x at end-June 2017 will provide a comfortable cushion for its capex and investment plan of THB250 billion-THB260 billion over the next five years, including the LSP project.

According to SCC, it will maintain its five-year capex and investment plan. In our view, the company is likely to adjust, postpone, or cancel some of its projects in the plan as SCC expects the LSP project cost to be about THB188 billion, or about 70% of its investment budget over the next five years. SCC has flexibility to adjust its investments as most of the plans are uncommitted, such as a capacity expansion for existing plants or potential M&A. However, a significant increase in capex and investment beyond Fitch's expectation could have a negative rating impact.

Improving Geographic Diversification: The Positive Outlook on SCC's ratings reflects our view of its improving business profile with its regional expansion and investment, which will support further improvements in SCC's credit profile once they generate meaningful cash flows. Cement capacities outside of Thailand are likely to account for 31% of total cement capacity in 2017, compared with 4% in 2014. Furthermore, the operations in those countries should generate higher profit margin than exports from Thailand.

The LSP project will also diversify SCC's business profile as it is a large integrated chemical project outside Thailand. It will add capacity of about 1.6 million tonnes per annum of olefins to existing capacity in Thailand of 3.1 million tonnes (excluding equity stake in an Indonesian plant). Fitch expects the LSP project to enlarge SCC's operating scale and provide commercial benefits to SCC over the long term. However, the project will not generate cash inflow in the near term because construction is expected to take around 4.5 years.

Well-Diversified Businesses: SCC's ratings are also supported by the diverse sources of revenue from its core businesses – cement and building materials (CBM), chemicals, and packaging – which have helped smooth its operating cash flow and mitigated some sector-specific risks. For example, in 2015-2016, benefits from the upturn in chemicals more than offset the muted local demand for cement.

Leading Market Position: SCC is one of Thailand's largest conglomerates. Its ratings are underpinned by its leading market position in its core products. SCC has the largest capacity and market share in cement, ceramic tiles, downstream chemicals (polyolefins and PVC), and packaging paper in the domestic market and several south-east Asian countries. Fitch expects SCC to generate EBITDA of THB75 billion-80 billion a year with margin of 15%-17% in 2017-2019. The chemicals business is likely to remain a key earnings contributor in 2017, as the recovery in the CBM business is likely to strengthen only in 2018.

Product Cyclicality: The ratings also take into account SCC's inherent exposure to the cyclicality of the chemicals business. Furthermore, SCC has a lack of pricing influence because the bulk of its products are commodities, the prices of which are determined by global demand and supply.

DERIVATION SUMMARY

SCC has the strongest business profile relative to the peers in Thailand's building materials sector, including Siam City Cement Public Company Limited (SCCC, A(tha)/Stable) and Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable). SCCC and TASCO both have single business lines, and SCCC has lower market share in the cement market in Thailand than SCC. In term of financial profile, SCC's financial leverage is higher, but this is counterbalanced by its significantly larger operating scale and diversification across businesses.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Revenue to grow at about 10% in 2017 largely from the chemicals business, and about 5% in 2018 driven by the CBM segment

- EBITDA margin to reduce to 15%-17% in 2017-2018

- Capex of THB45 billion-60 billion a year in 2017-2018

- Dividend payout ratio between 40%-50% in 2017-2018

RATING SENSITIVITIES

Developments that may, individually or collectively, lead to positive rating action:

- A meaningful cash-flow contribution from regional operations while maintaining the FFO adjusted net leverage at below 2.8x.

Developments that may, individually or collectively, lead to negative rating action:

- Failure to meet the above positive rating guidelines could lead to the revision of Outlook back to Stable.

LIQUIDITY

Comfortable Liquidity: SCC's liquidity position is supported by cash and liquid investments (Fitch defined) of about THB41.5 billion at end-June 2017, strong cash flow from operations of above THB50 billion a year, and strong refinancing ability through local debt-capital markets and bank funding. At end-June 2017, total debt was THB193 billion, of which 86% was baht-denominated senior unsecured debentures. About 37% of total debt will mature in the next 12 months.