The affirmation reflects TOP's continued strong business profile. The current low financial leverage provides headroom for the company's plan for a large new investment, which is under review.
KEY RATING DRIVERS
More Headroom for Investment: Fitch expects TOP's EBITDA to fall to THB23 billion-25 billion in 2018-2019, after reaching a record high of THB36.2 billion in 2017. This reflects temporary disruption of supplies due to an outage at US refineries, which has been resolved, and margin pressures from new refining capacity. However, Fitch expects strong internal cash flows to adequately cover committed capex and dividend payments in 2018. As a result, TOP's FFO adjusted net leverage should stay at a very low level in 2018, following a decline to 0.1x in 2017 (2016: 0.6x). This should give the company more headroom to support additional investments and manage volatile product margins.
High Uncommitted Capex: TOP has a significant discretionary investment plan for its clean fuel project (CFP), which is currently under review. The project will increase TOP's refining capacity and enhance its upgrading units. The project is likely to require large capex. The investment amount and financing structure for the project has not been determined, with the company only due to make a final investment decision by end-2018. Fitch will review the impact of the project on the company's credit profile once TOP finalises the investment and funding structure.
Low Cost, Complex Refiner: TOP has a competitive advantage as an operator of the country's most complex and largest crude refinery, which accounted for 29% of Thailand's refining capacity in 2017. TOP's complex facilities and its high utilisation rate enhance its cost competitiveness, provide crude sourcing flexibility, and allow the company to optimise production for higher-grade and higher-margin products than its domestic peers.
Business Diversification: TOP's expansion into aromatics, lube base oil, solvents and other support businesses (such as petroleum logistics, power generation and services) has helped to diversify its revenue sources and reduce margin volatility. The increased revenue from a more stable power business, driven by a full year of operation of TOP's two small power producers, should help to partly offset cash flow volatility of its core refining business. However, EBITDA from the power business is still small at around THB2.8 billion, or around 8% of total EBITDA in 2017.
Highly Cyclical: TOP's credit profile is restrained by the inherent cyclicality of its businesses and the concentration of its production facilities at one site. The volatility of refining margins, oil prices and working capital requirement could significantly affect its earnings and cash-flow generation. TOP is also exposed to some market concentration risk as the majority of its sales are to its major shareholder PTT Public Company Limited (PTT (AAA(tha)/Stable). This is moderately mitigated by PTT's strong credit profile and its position as Thailand's leading oil marketing and trading company.
Linkages with PTT: TOP's National Long-Term Rating incorporates a moderate linkage with its major shareholder PTT, which owns 49% of TOP, resulting in a one-notch uplift from its standalone credit profile. TOP is PTT's largest refinery and its refined products sales to PTT represent around one-third of PTT's oil-retailing business sales. Furthermore, PTT provides commercial support to TOP, including a 10-year product offtake and crude supply agreement and inter-company borrowing and lending contract.
DERIVATION SUMMARY
TOP's standalone credit profile of 'A+(tha)' reflects the size and complexity of its production facilities. Its business profile is strong relative to Thai downstream oil and gas peers, while it has the lowest financial leverage among peers. TOP's refinery is more complex and larger than that of IRPC Public Company Limited (A-(tha)/Stable, standalone credit profile of BBB+(tha)). The company also has much stronger balance sheet and better operating profit margin given higher utilisation rate at its plant. However, TOP has smaller operating scale and less integration to petrochemicals than PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile of AA-(tha)). PTTGC also has better profitability, due to its large petrochemical operations, which have higher operating margins.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Benchmark Brent crude at USD57.50 per barrel, with TOP's crude procurement costs adjusted for applicable premiums
- Market refining margin to soften in 2018-2019 and stay flat thereafter
- Refinery utilisation rate of 101%-105% in 2018-2022
- Aromatic's profitability to improve gradually in 2018-2019 and stay flat thereafter
- Lube base's profitability to gradually decrease in 2018-2019 and stay flat thereafter
- Capex to increase in 2018 due to delays in spending of capex in 2017, and to decrease in 2019-2020
- 50% dividend payout ratio
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- FFO-adjusted net leverage sustained below 0.8x, although this is unlikely given expected high uncommitted capex over the medium term.
- Proof of stronger ties with PTT
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Lower-than-expected refining margins and petrochemical spreads and/or an increase in debt-funded investments resulting in FFO-adjusted net leverage rising above 1.8x, on a sustained basis.
- Weakened ties with PTT.
LIQUIDITY
Strong Liquidity: TOP has very strong liquidity that is supported by its non-restricted cash and cash equivalents of THB65.2 billion as of end-2017. This is more than adequate to cover its THB2.5 billion debt maturing within the next 12 months. The liquidity is reinforced by its expected positive free cash flow in 2018, a THB2.0 billion credit facility from PTT, THB0.3 billion in committed facilities from financial institutions and its ability to raise funds in the capital market. TOP also has a very comfortable debt maturity profile with an average debt life of 10.8 years.