The upgrade reflects a consistent improvement in SGP's financial profile, following a streak of sound operating results and a strengthened balance sheet. The upgrade also incorporates SGP's sustained profitability despite a heightened exposure to price risk.
The ratings continue to reflect the company's strong market position in Thailand and robust distribution network. The ratings are, however, partially offset by high business risk from SGP's operations abroad which expose the company to fluctuations in the prices of liquefied petroleum gas (LPG).
KEY RATING CONSIDERATIONS
Strong market position in Thailand
SGP is the second-largest LPG distributor in Thailand, holding about 24.4% market share, by LPG trading volume, in 2017. SGP trails PTT PLC (PTT) which has the largest market share of 39.6%, but leads the third-ranked WP Energy PLC (20.1%).
Although demand for LPG in Thailand remains tame, TRIS Rating holds the view that SGP's domestic sales are a source of stable profits due to its regulated price. However, a portion of profit in the domestic market is more volatile after the company started importing LPG to sell in the domestic market in 2017, instead of entirely purchasing from PTT. SGP's volume of LPG imports amounted to approximately 40% of total domestic sales volume in 2017.
Robust distribution network
SGP's competitive advantages are underpinned by a strong logistics system which supports its trading activities. The core facilities in Thailand include eight LPG storage terminals, a nationwide network of service stations, and a number of LPG trucks and tankers. Abroad, the company owns two large storage caverns in China capable of storing 300,000 tonnes of LPG, sizable floating storage in Singapore, and a fleet of LPG tankers to support its off-shore trading operations in East Asia. These core facilities make SGP's transportation cost more competitive and give the company access to more markets than peers.
Larger contribution from growing overseas markets
SGP has been expanding abroad over the past several years, a move to steer the company away from the sluggish domestic market. The international operation has grown consistently, outpacing the growth of the domestic operation. In 2017, the overseas volume made up 67.4% of total sales volume. The key growth driver is a tremendous expansion in the Chinese market, which is now the centerpiece of SGP's business. SGP has grown steadily in China, on the back of a well-established market presence as a large LPG importer and its good demand. The Chinese market accounted for nearly 40% of total sales volume in 2017, continually up from 13% in 2013.
Exposure to price risk from overseas trading
The success of the international operations is counterbalanced by greater exposure to the volatility of LPG prices in the global market. The company's earnings remain susceptible to a precipitous fall in LPG prices and intense competition among distributors, particularly in the Chinese market.
The LPG price has moved favorably to SGP's business. The LPG price was about US$473 per tonne in April 2017, compared to a 10-year average of US$660 per tonne and the lowest price of about US$300 per tonne. The low level of LPG price also indicates limited possibility of a plunge, which causes a devastating loss SGP experienced in 2014. In our forecast, the LPG price is expected to oscillate in a manageable range. SGP's prudent management of inventory turnover will insulate the company somewhat to inopportune price swings.
Strengthened financial profile
SGP reported a three-year streak of healthy operating performance during 2015-2017. The good operating performances were due in large part to narrower fluctuations and a nascent recovery in the price of LPG. SGP's generated FFO was about Bt2.1 billion in 2015 and 2016, before soaring to a record of Bt4.55 billion in 2017 thanks to an about 40% increase of average price of LPG in 2017.
SGP's financial leverage is on the mend. Its total debt has remained nearly constant over the past three years, meanwhile a string of profits enlarged the equity base. Hence, the debt to capitalization ratio fell steadily to 45.6% in the first quarter of 2018 from over 50% prior to 2016. The FFO to total debt ratio ranged from around 20%-40% over the same period, suggesting a fairly large cash flow cushion against debt.
Under TRIS Rating's forecast, the company's FFO tends to fluctuate significantly from quarter to quarter. However, throughout the year, TRIS Rating believes that SGP is able to deliver the averaged FFO of Bt2.5 billion per annum and maintain the FFO to total debt ratio at over 20%.
Adequate liquidity
SGP's liquidity is adequate. Sources of funds comprised cash on hand of Bt2.1 billion at the end of March 2018, undrawn credit facilities of Bt13-Bt14 billion, and estimated FFO of at least 2.0 billion over the next 12 months. Uses of funds over the next 12 months include long-term loans coming due worth Bt740 million, bond repayments of around Bt3 billion, and the capital expenditures of around Bt2 billion for the construction of new LPG storages in its new market.
According to SGP's bond financial covenant, the company has to maintain the ratio of interest bearing debt (IBD) to equity not to exceed 2 times. Its IBD to equity ratio was merely 0.93 times at the end of 2017. Given its planned expenditures, TRIS Rating expects the company can comply with the financial covenant.
RATING OUTLOOK
The "stable" outlook embeds the expectation that SGP will be able to maintain its strong position as the second-largest LPG distributor in Thailand. Reliable cash flows from domestic LPG operations will partly alleviate the volatile margin of the international operations. Further, TRIS Rating also expects SGP to remain profitable in overseas trading, albeit relatively higher susceptibility to price risk.
RATING SENSITIVITIES
A rating upgrade could happen if cash flow is larger and more stable or if the debt to capitalization ratio fall considerably from the current level. These outcomes could be achieved if SGP can create stronger competitive position in China or extend sources of stable income.
The ratings could be revised downward if SGP's financial profile materially deteriorates for an extended period. This could arise if the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio or the FFO to total debt ratio falls below TRIS Rating's expectation or if there are large debt-funded acquisitions which significantly jeopardize its financial profile.
The issue rating and outlook for SGP's partially guaranteed debentures reflect the creditworthiness of both the issuer and its guarantor, CGIF. The issue rating could be revised upward or downward should there be any changes in the credit profiles of SGP or its guarantor.
COMPANY OVERVIEW
SGP is the second-largest LPG distributor in Thailand, covering LPG trading under the "Siam Gas" and "Unique Gas" brands. The company was established by the Weeraborwornpong family in 2001 and listed on the Stock Exchange of Thailand (SET) in 2008. The Weeraborwornpong family held 61% of SGP's total shares as of December 2017.
Before 2011, SGP's domestic LPG trading segment comprised 85%-90% of SGP's total revenue; the rest was contributed by the trading of ammonia and other businesses. After expanding abroad in 2010, revenue from the international LPG trading segment rose continually, and accounting for about 60%-70% of total revenue. In 2017, SGP sold around 3.16 million tonnes of LPG. The volumes sold in the domestic and international segments were approximately 1.03 million tonnes and 2.13 million tonnes, respectively.
In 2016, SGP started diversifying into a new line of business: power generation. SGP invested in a 30% share of a power plant in Myanmar with production capacity of 230 megawatts (MW). The company decided to increase its shareholding in the power plant to 36.1% in November 2017. In 2018, the company also invested in 33% share of a 10-MW diesel-fired power plant in Myanmar.
Siamgas and Petrochemicals PLC (SGP)
Company Rating: BBB+
Issue Ratings:
SGP192A: Bt3,000 million senior unsecured debentures due 2019 BBB+
SGP201A: Bt2,000 million senior unsecured debentures due 2020 BBB+
SGP232A: Bt2,000 million senior partially guaranteed debentures due 2023 A+
Rating Outlook: Stable