Fitch Affirms Polyplex Thailand at #A-(tha)#; Stable Outlook

Stocks and Financial Services Press Releases Friday April 12, 2019 15:29
Bangkok--12 Apr--Fitch Ratings
Fitch Ratings-Bangkok-12 April 2019: Fitch Rating (Thailand) Limited has affirmed Polyplex (Thailand) Public Company Limited's (PTL) National Long-Term Rating at 'A-(tha)'. The Outlook is Stable.

The rating reflects PTL's leading position in the polyester film business, geographically diversified operations and strong financial profile. This is counterbalanced by the inherent volatility of the sector in which PTL operates.

The rating on PTL is based on its parent Polyplex Corporation Limited's (PCL) consolidated profile given Fitch's assessment of strong linkage between PTL and its parent, which Fitch assess to have a weaker credit profile than its subsidiary.

KEY RATING DRIVERS

Leading Polyester Film Producer: The rating on PTL reflects its leading position in the polyester film business. The consolidated operations of PCL (known as Polyplex Group) form one of the 10 largest biaxially oriented polyethylene terephthalate (BOPET) film producers in the world by output, with market share of about 5% in the thin PET film market. Polyplex Group's production capacity is comparable with those of the global producers, such as Toray and Mitsubishi. However, specialty films make up a smaller share of Polyplex Group's portfolio compared with its competitors.

Strong Credit Metrics: PTL likely generated higher-than-expected operating cash flows in the fiscal year ended March 2019 (FY19), which provides headroom to support its planned investment and manage any decline in product margins. Fitch expects PCL's consolidated EBITDAR adjusted net leverage to increase to 0.5x in FY20 (FY18: net cash) due mainly to higher capex, before it returns to net cash position.

Geographically Diversified Operations: PTL has three manufacturing facilities that cover three key markets - Thailand (Asia), the US (North America) and Turkey (Europe). PTL plans to add another production facility in Indonesia in 2019. A geographically diversified production base mitigates the seasonal demand in different continents and operational risk resulting from disruptions at one of its manufacturing plants. The proximity of production facilities to its markets also helps reduce logistics costs and the impact from trade barriers, particularly in the net import regions like North America and Europe.

Well-Diversified Customer Base: PTL's sales are well distributed among its key three regions of Asia, North America and Europe, supported by its marketing network and production bases in the regions. Its sales to the industrial sector have increased for the past five years, and accounted for about 42% of total sales in FY18, which has reduced its high concentration in the flexible packaging business. PTL serves about 1,600 customers globally. PCL and PTL have been in the polyester film business for more than 30 years.

High Product Cyclicality: PTL is exposed to the cyclical polyester film business. Moreover, the company has limited pricing influence because the majority of its products are standard films that are commodities and face high competition. Standard films account for 65%-75% of PTL's total annual sales. Nevertheless, PTL has increased value-added products, including metalised film and coated film, and expanded sales in specialty flexible packaging to reduce the impact from cycles in commodity thin films. Its sales from value-added products increased to about 33% of total sales in FY18.

Volatile Feedstock Prices: PTL is vulnerable to fluctuations in raw-material prices - mainly purified terephthalic acid (PTA) and mono ethylene glycol (MEG). PTA and MEG prices are driven by their petrochemical feedstock prices, which are largely driven by oil prices. Although PET film prices tend to move in tandem with raw material prices, they are also driven by demand and supply of PET films. The PET film market is oversupplied with large new capacities added in 2011-2016 that have reduced the industry's operating rates and margins. However, pressure from the oversupply eased in 2018 and Fitch expects the trend to continue in 2019.

Linkages with Parent: Fitch views that PTL has strong operational linkages with PCL, and PTL's standalone credit profile is stronger than that of its parent, as assessed under Fitch's Parent and Subsidiary Rating Linkage criteria. PTL's National Rating is therefore based on PCL's consolidated financial profile, which has been adjusted to include 100% of PTL and take into account the sizeable minority shareholders in PTL. Fitch's assessment of strong linkage between the two entities is based on board control by the parent, commonality of management team and PCL's access to its key's subsidiary's cash and cash flows.

DERIVATION SUMMARY

Polyplex Group's business profile is moderate relative to Thai nationally rated peers, but its financial profile is stronger. Polyplex Group's business and financial profiles are comparable with those of KCE Electronics Public Company Limited (KCE, A-(tha)/Stable), one of the world's top 10 automotive printed circuit board (PCB) producers by revenue. KCE operates in a higher-risk industry, component electronics, but this is offset by KCE's focus on the niche segment of automotive PCB, which has higher barriers to entry. Polyplex Group has more geographically diversified operations and a diversified customer base. KCE generates higher EBITDA margin, but both companies have low financial leverages with total adjusted net debt to EBITDAR of below 1.5x. The ratings are, therefore, the same.

Compared with IRPC Public Company Limited (A-(tha)/Stable, standalone credit profile of BBB+(tha)), Polyplex Group has significantly smaller operating scale, as IRPC is a fully integrated oil refining and petrochemical producer. However, Polyplex Group has more geographically diversified operations, which mitigate its concentration in the PET film business. Polyplex Group's products are used in downstream applications, with an increasing proportion of value-added products to help reduce the impact from the cyclical nature of commodity thin films. Polyplex Group also has lower financial leverage, which results in a higher rating than IRPC's 'BBB+(tha)' standalone credit profile. IRPC's National Long-Term Rating incorporates a one-notch uplift to take into account its moderate linkages with its single largest shareholder, PTT Public Company Limited (AAA(tha)/Stable).

KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
  • Revenue growth of about 4%-5% in FY20-FY21 as high sales volume growth due to new capacity in Indonesia will be partly offset by expected lower selling prices
  • Operating EBITDA margin of about 15% in FY20-FY21. Weakened margin to reflect the ramp-up in production of new capacity in Indonesia
  • Capex to total about THB4.2 billion in FY19-FY21
  • Dividend payout of 40% of net income
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • Significant increases in operating scale and specialty product sales resulting in higher and stable profit margin, while maintaining total adjusted net debt to EBITDAR of PCL (with full consolidation of PTL) below 1.5x, although these are unlikely to occur over the next 12 to 18 months.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • Lower cash flows or higher debt-funded investments than Fitch expects, leading to total adjusted net debt to EBITDAR of PCL (with full consolidation of PTL) above 2.0x on a sustained basis
  • Deterioration of EBITDA margin of PCL (with full consolidation of PTL) to below 13% on a sustained basis (FY18: 15.2%)
LIQUIDITY

Manageable Liquidity: Fitch views PTL's liquidity as manageable. The liquidity is supported by its cash on hand of THB594 million at end-December 2018. Debt maturing over the next 12 months from December 2018 amounts to about THB2.2 billion, of which about 73% is short-term debt mainly used for working capital. PTL has available working-capital facilities, although uncommitted, from financial institutions of about THB1.2 billion. Fitch expects the company to be able to roll over its short-term debt, supported by its low financial leverage. PTL has secured USD55 million of term loans to finance its new plant in Indonesia.


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