Fitch has simultaneously chosen to withdraw all of WHAUP's ratings for commercial reasons.
KEY RATING DRIVERS
Strong Business Profile: WHAUP benefits from low business risk stemming from limited competition in its market and recurring income from long-term contracts. Stable demand from customers underpins predictable and recurring revenue, while its operating margin should remain steady due to cost-plus tariff pricing, which allows the company to pass on cost increases to customers. WHAUP is the sole provider of essential water services to industrial users in industrial estates and land operated by its major shareholder, WHA Industrial Development Public Company Limited (WHA ID).
Strong Earning Growth: Fitch expects WHAUP's revenue to rise strongly in 2018 and 2019 due to stronger demand for water from the commissioning of new small-power producers in its service area and a tariff hike during the period. The higher demand is also likely to come from strong industrial land sales in WHA ID's estates during 2018; the new tenants will become WHAUP water service customers.
Higher Dividend from Joint Venture: Fitch expects WHAUP to receive higher dividends from its partly owned power companies of THB1.2 billion-1.3 billion in 2018 (2017: THB687 million) due to the commissioning of new power projects, in which WHAUP has minority stakes. Fitch believes dividends from these investments are predictable, as most of the revenue is secured by long-term power purchase 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 a lack of a minimum off-take requirement with customers. Falling water usage from changes in customers' production activities could lead to lower revenue and earnings. However, Fitch believes the risk is manageable, as WHAUP has a diversified customer base and the majority of WHAUP's customers, which are petrochemical companies, are likely to have stable demand. Total volume of water sales and wastewater treatment increased steadily yoy for the previous six years, with the exception of 2015, when volume decreased slightly by 0.7%. Overall, volume has increased by a healthy 5% CAGR since 2010.
High Investment; Moderate Leverage: Fitch expects negative free cash flow in 2018 due to high investments. Fund flow from operations (FFO) of around THB1.5 billion a year is unlikely to cover capex and dividend payment, although higher FFO should help the company maintain its FFO adjusted net leverage at a moderate 4.0x-4.5x over the next two 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 the strong linkages with its ultimate parent, WHA Corporation Public Company Limited, which has a weaker credit profile. WHAUP's ratings are constrained by Fitch's internal assessment of its parent as per the agency's Parent and Subsidiary Rating Linkage criteria. The strong linkages are based on the parent's controlling stake in WHAUP and its ability to influence WHAUP's business, financial policy and overall strategic and investment decisions.
DERIVATION SUMMARY
WHAUP's business profile is strong relative to Thai national peers. Its earning and operating cash flow profiles are close to those of Bangkok Aviation Fuel Services Public Company Limited (A+(tha)/Negative), which operates aircraft refuelling services at Thailand's major airports, and Global Power Synergy Public Company Limited (A+(tha)/Stable), a medium-sized power and stream generator. These companies have highly predictable and stable earnings due to low competition, stable demand or recurring income from long-term contracts. However, WHAUP 'A-(tha)' standalone rating is lower than that of the two peers due to WHAUP's weaker financial leverage.
WHAUP's ratings are constrained by the credit profile of its ultimate parent, which has a weaker credit profile, given the strong linkages between the two entities. The strong linkages are based on the parent's controlling stake in WHAUP and its ability to exert influence over WHAUP's business, including voting rights at shareholder meetings, election of directors, dividend payments and overall strategic and investment decisions.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue from the water business to increase by around 19%-23% a year in 2018 and 2019, supported by higher demand and tariff increases
- EBITDAR margin of around 41% in 2018 and 2019
- Dividends from stakes in power projects of around THB1.2 billion-1.3 billion a year in 2018 and 2019
- Capex of THB300 million-400 million a year in 2018 and 2019 and commitments to inject equity of THB1 billion in 2018 and THB184 million in 2019 into its partly owned power projects
- Investment in new utilities and power businesses of around THB1.5 billion over 2018-2020
- 40% dividend payout ratio.
RATING SENSITIVITIES
No longer relevant as the ratings have been withdrawn.
LIQUIDITY
Strong Liquidity: The company had total debt of THB7.9 billion at end-2017, of which THB4 billion was debentures due in 2020. The company also plans to issue new debentures in 2018 to refinance its remaining THB3.9 billion bank loan.