Fitch Upgrades Thailand#s IRPC to #A(tha)#; Outlook Stable

Stocks and Financial Services Press Releases Monday June 24, 2019 15:17
Bangkok--24 Jun--Fitch Ratings

Fitch Ratings (Thailand) has upgraded IRPC Public Company Limited's National Long-Term Rating and senior unsecured rating to 'A(tha)' from 'A-(tha)'. The Outlook is Stable. Fitch has also upgraded IRPC's National Short-Term Rating to 'F1(tha)' from 'F2(tha)'.

The upgrade reflects Fitch's reassessment of the strategic importance of the petrochemical and refinery business to its parent, PTT Public Company Limited (AAA(tha)/Stable), after business reorganisation over the past few years. The business, in which IRPC is a major component, is more important than we previously anticipated. The petrochemical and refinery business accounted for around 31% of group revenue in 2018 and was the second-largest contributor to group EBITDA at 28%, after the 36% contribution from the exploration and production business.

IRPC is highly strategically important to PTT's petrochemical and refinery business as it is PTT's key petrochemical producer, focusing on downstream products and naphtha-based production. PTT views IRPC as its downstream specialty petrochemical vehicle. In addition, PTT has extended credit terms for crude supply to IRPC to alleviate cash flow pressure during IRPC's period of high investment. This has led us to revise the uplift to IRPC's standalone credit profile (SCP) of 'bbb+(tha)' to two notches instead of one. The SCP reflects IRPC's improving business profile following project upgrades. We expect a temporary increase in IRPC's financial leverage to above the level at which we would consider negative rating action in 2022 due to high investment, then to fall to a level commensurate with its rating.

KEY RATING DRIVERS

Rising Capex; Leverage to Increase: Fitch expects IRPC's capex to increase to about THB68 billion in 2019-2022, from the previous expectation of THB46 billion, as the company has committed to invest in an upgrading project to meet EURO5 emission standards (EURO5). Fitch also expects the company to commit to a paraxylene (PX) project following an investment review. Therefore, Fitch expects IRPC's FFO adjusted net leverage to increase to 4.5x-5.5x in 2021-2022 (2018: 3.0x), before declining from 2023 to below 4.5x as the capex levels off.

Credit Terms Support Flexibility: Fitch believes the extended credit terms on IRPC's crude purchases from PTT provide financial flexibility and liquidity support for IRPC to manage its leverage. IRPC has extended the period of 60-day credit terms until end-2019, when they will return to the normal 30-day terms. The terms will be reviewed annually and can be extended by mutual agreement, according to the company.

Improving Business Profile: Fitch expects IRPC's margin and earnings to be supported by increased output of higher-value-added products and an expanded crude run. The start of its polypropylene expansion project and polypropylene inline compound project has boosted its margin, as these products have higher spreads than commodity-grade polypropylene. IRPC has also increased the crude run of Atmospheric Distillation Unit 2 after major turnaround works in 2017. Fitch also expects committed project upgrades to enhance profitability upon completion, scheduled in 2022-2023.

Fully Integrated Refinery: IRPC has a competitive advantage as a fully integrated refining and petrochemical company with expertise and a long record in Thailand. Its recent and planned investments pave the way for further integration into petrochemical products. Vertically integrated producers enjoy cost advantages, a broader product range and lower earnings volatility relative to non-integrated operators.

Highly Cyclical Business: IRPC'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 oil prices, refining margin and petrochemical spreads, as well as high working-capital requirements, could significantly affect earnings and cash-flow generation.

DERIVATION SUMMARY

IRPC's National Long-Term Rating incorporates a two-notch uplift from its SCP on moderate linkages with PTT. IRPC is PTT's key petrochemical producer focusing on downstream products and naphtha-based production. PTT has provided commercial support to IRPC, such as extending credit periods for feedstock supplies as well as inter-company borrowing and lending agreements.

IRPC's SCP reflects the integration of its refining and petrochemical operations. Its business profile is moderate relative to Thai downstream oil and gas peers, while its leverage is high. IRPC has a much smaller operating scale and higher leverage than PTT Global Chemical Public Company Limited (AA+(tha)/Stable, SCP: aa-(tha)). Compared with Thai Oil Public Company Limited (TOP, AA(tha)/Stable, SCP: a+(tha)), IRPC's refinery is less complex and smaller. TOP has a stronger balance sheet over the long term and better operating profit margin due to its higher utilisation rate at its plant. IRPC's operating scale is larger than that of Esso (Thailand) Public Company Limited (bills of exchange: F1(tha)) with better margin, but higher leverage. However, ESSO has stronger linkages with its parent.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Benchmark Brent crude at USD65.0/barrel in 2019, USD62.5/barrel in 2020, USD60.0/barrel in 2021 and USD57.5/ barrel from 2022, with IRPC's crude procurement costs adjusted for applicable premiums
  • Gross integrated margin to improve in 2019 and slightly soften in 2020-2021
  • Capex and investment of THB71.0 billion over 2019-2023
  • 60-day credit-term extension to continue in 2019 and return to normal 30-day terms in 2020
  • 50% dividend payout ratio
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • FFO adjusted net leverage sustained below 3.0x
  • Evidence of stronger ties with PTT
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • Weaker operating cash flow than Fitch's expectations, increasing debt-funded investments or high cash distributions to shareholders, resulting in FFO adjusted net leverage rising above 4.5x for a sustained period
  • A weakening of linkage with PTT
LIQUIDITY

Sufficient Liquidity: IRPC had outstanding debt of THB57.5 billion at end-2018, with THB13.8 billion maturing within 12 months; this consists of THB3.4 billion in bonds, THB3.7 billion of the current portion of long-term debt and THB6.7 billion of short-term borrowings from financial institutions. Liquidity is supported by unrestricted cash of THB2.3 billion, available committed working-capital facilities of THB5.2 billion, a credit facility from PTT of THB10.0 billion and the extension of the flexible credit terms from PTT.


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