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 to Rise; Within Expectations: Fitch expects SCC's FFO adjusted net leverage to rise to about 3.0x in the next three years (end-3Q18: 2.1x, end-2017: 1.9x), given heavy capex. The company revised some uncommitted investment plans so that total capex will remain roughly about THB260 billion over the next five years, the majority of which are investments in the Long Son Petrochemicals (LSP) project and for expanding capacity at its Map Ta Phut Olefins Cracker (MOC) through debottlenecking.
Although Fitch believes that the company has some flexibility to adjust its uncommitted investments, a significant increase in capex and investment beyond Fitch's expectation could have a negative rating impact.
Improving Diversification in CBM: Cement and building materials (CBM) operations in ASEAN increased to about 21% of total revenue in 2017, from 14% in 2014. Fitch expects the segment's share of revenue to rise to 25%-30% over the medium term. The CBM expansion in ASEAN was completed by 1Q17, resulting in total cement capacity outside Thailand of 10.5 million tonnes per annum, or 31% of its current total capacity. However, Fitch also expects fiercer competition in ASEAN countries due to additional supply coming on stream, which will put pressure on profit margins over the next couple of years.
Well-Diversified Businesses: SCC's ratings are supported by the diverse sources of revenue from its core businesses - CBM, chemicals, and packaging - which have helped smooth its operating cash flow and mitigate some sector-specific risks. Strong cement demand in the domestic market compensated for the previous trough in petrochemicals in 2011-2012 and the upturn in chemicals over the past three years has more than offset the weak domestic 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 THB65 billion-75 billion a year with margins of 14%-15% in 2018-2019. The chemicals business is likely to remain a key earnings contributor in 2018, as the recovery in the CBM business is likely to be slow.
Product Cyclicality: The ratings also take into account SCC's inherent exposure to the cyclicality of the chemicals business. Furthermore, SCC lacks pricing influence because commodities form the bulk of its products and their prices are determined by global demand and supply.
DERIVATION SUMMARY
SCC has stronger business profile than its closest peer in Thailand's building materials sector, Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), given SCC's larger domestic cement market share. SCC has a higher rating than SCCC, which mainly reflects its significantly larger operating scale and diversification across various businesses.
Compared with PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile of AA-(tha)), the largest integrated refining and petrochemical operator in Thailand, SCC has a smaller chemicals business but it has broader diversification across industries, which reduces exposure to volatility in the chemicals industry. However, PTTGC has a more conservative financial profile, resulting in a higher rating.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to grow at about 4% in 2018 largely from the chemicals business, and about 7% in 2019, driven by the CBM and chemicals businesses
- EBITDA margin to drop to 14%-15% in 2018-2019
- Five-year capex plan of about THB260 billion
- Dividend payout ratio of 40%-50% in 2018-2019
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- We do not expect positive rating action unless there is a significant profit contribution from the overseas expansion of its chemicals business, for instance, from the full operation of the LSP project in Vietnam.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A weakening of the company's business and financial profile resulting in FFO adjusted net leverage sustained at above 2.0x during the normal run of business, or above 3.0x during a business expansion phase.
LIQUIDITY
Manageable Liquidity: SCC's liquidity is supported by cash and liquid investments (Fitch defined) of about THB50 billion at end-September 2018, strong cash flow from operations of above THB55 billion a year, and strong refinancing ability through local debt-capital markets and bank funding. At end-September 2018, total debt was THB204 billion, almost 90% of which was baht-denominated senior unsecured debentures. About 22% of total debt will mature in the next 12 months.