Fitch Revises PTT Global Chemical to Negative; Affirms at 'AA+(tha)'

Stocks and Financial Services Press Releases Wednesday April 1, 2020 10:04
Bangkok--1 Apr--Fitch Ratings
Fitch Ratings (Thailand) Limited has
revised PTT Global Chemical Public Company Limited's (PTTGC) Outlook to
Negative from Stable. The agency has also affirmed PTTGC's National Long-Term
Rating and senior unsecured rating at 'AA+(tha)' and National Short-Term Rating
at 'F1+(tha)'.
At the same time, Fitch has assigned a
National Long-Term Rating of 'AA+(tha)' to the company's proposed senior
unsecured debentures of up to THB15 billion. The proceeds will be used as
working capital, to refinance existing debt and to fund capex. The proposed
debentures are rated at the same level as PTTGC's National Long-Term Rating, in
line with its other senior unsecured obligations.
The Negative Outlook reflects the risk
that PTTGC's financial leverage - measured by FFO net leverage - would remain
above 2.0x by 2022 and beyond. Fitch currently expects leverage at end-2020
(2019: 2.9x) to remain above 2.0x (the level that is not commensurate with its
current ratings), affected by weak demand and margins due to COVID-19,
inventory losses due to the sharp fall in crude oil prices, and ongoing capex.
We expect leverage to fall below 2.0x by
2022, supported by an improvement in cash flows - benefiting from earnings from
expanded capacities in addition to a general improvement in demand and margins
and product spreads post-COVID-19, and low capex. However, PTTGC's financial
leverage could be sustained above 2.0x if demand or margins remain weak on
account of a protracted weakened economic environment beyond 2021 which could
constrain a significant earnings recovery.
KEY RATING DRIVERS
Weak Earnings in 2020: Fitch expects
EBITDA to fall in 2020, at around THB10 billion-15 billion, from THB24.9
billion in 2019. The petrochemical sector has been under pressure since 2019,
and is likely to be depressed further by a combination of demand shock from the
coronavirus, an increase in supply from new petrochemical capacity, and inventory
loss from a sharp drop in oil prices in 1Q20.
Nevertheless, petrochemical spreads should
recover somewhat in 2021, supported by the demand recovery, although they are
likely to remain well below 2017 and 2018 levels. Waning demand due to the
coronavirus-related disruption will pressure refining margins in the near term,
although we expect the margin to improve over the medium term.
Leverage to Improve from 2021:Financial
leverage should improve in 2021 despite credit metrics remaining weak in 2020. Fitch
expects the PTTGC to generate positive FCF in 2021 - given higher earnings from
an improvement in refining margins and petrochemical spreads, higher-volume
sales from the enlarging capacity, and a significant drop in capex.
Fitch expects PTTGC's FFO net leverage to
decrease to below 2.5x in 2021, and further to 1.7x in 2022, from an expected
7.5x in 2020. However, our forecast is based on the expectation that PTTGC will
undertake a prudent capital-preservation strategy including a reduction in shareholder
returns, and not to undertake any large capacity expansions or acquisitions
until earnings improve on a sustained basis - which is crucial in maintaining
credit metrics.
Capex Prioritisation: PTTGC's capex is
likely to decrease significantly from 2021 following the completion of a
propylene oxide (PO) and polyols project, and an olefins reconfiguration
project (ORP) which is scheduled to commence operations in 2020. Fitch does not
expect any large new investment in light of the currently weak market conditions.
We forecast PTTGC's capex to decrease to around THB31 billion in 2020, and
further to around THB14 billion in 2021 from the peak of THB40.8 billion in
2019.
Enlarging Capacity: PTTGC's sales volumes
should increase in the medium term, driven by its new petrochemical capacity.
The company commenced operations of its 200,000 ton per annum methyl ester
plant 2 in 2Q19. The PO and polyols project and the ORP will help drive revenue
and earnings growth from 2021.
Fully Integrated, Low-Cost Producer: Large
operating scale, a wide product range and high utilisation rate result in
larger operating cash flow and a wider operating margin than those of domestic
petrochemical and refining (P&R) peers. Furthermore, PTTGC benefits from
cost-competitive feedstock, as the majority of its olefins feedstock is
gas-based and available domestically. It also has a favourable gas-supply
agreement with its parent, which reduces margin volatility when market
conditions fluctuate.
Highly Cyclical Business: PTTGC's credit
profile is tempered by the inherent cyclicality of the P&R sectors. The
volatility of product-to-feed margins, refining margins, feedstocks prices, oil
prices and working-capital requirements could affect PTTGC's earnings and
cash-flow generation significantly. PTTGC is also exposed to supply
concentration risk, as the majority of its feedstock is secured from parent PTT
Public Company Limited (PTT; AAA(tha)/Stable). This is mitigated by PTT's
strong credit profile and position as Thailand's leading oil and gas company.
Linkage with Parent: PTTGC's National
Long-Term Rating incorporates a two-notch uplift from its Standalone Credit
Profile (SCP) of 'aa-(tha)', reflecting its moderate links with its parent, PTT
Public Company Limited (PTT; AAA(tha)/Stable). PTTGC is a major component of
the parent's P&R business, which is highly important as the segment
accounted for around 28% of group total revenue in 2019.
The segment also made the second-largest
EBITDA with average contribution over the past three years of around 27% after
the exploration and production business. PTTGC is strategically important to
PTT's P&R business as a major feedstock off-taker amid its flagship status
as the group's key petrochemical producer.
DERIVATION SUMMARY
PTTGC's National Long-Term Rating of
'AA+(tha)' incorporates a two-notch uplift from its standalone credit profile
of 'aa-(tha)', reflecting its moderate linkages with PTT. PTTGC is PTT's
largest petrochemical subsidiary and flagship company in the petrochemical
business, which was evident from the injection of PTT's petrochemical assets
into PTTGC in 2017. PTTGC benefits from the gas-supply agreement with PTT,
leading to a competitive feedstock cost. The favourable product off-take
agreements with PTT also help to reduce the margin volatility of its
petrochemical products to some extent.
PTTGC's standalone credit profile of
'aa-(tha)' reflects its operating scale and large integration with
petrochemicals, as well as its low-cost position as a gas-based petrochemical
producer. It has the strongest business profile among Thai downstream oil and
gas peers, while its financial leverage is also lower. PTTGC has larger
operating scale and more integration to petrochemicals than Thai Oil Public
Company Limited (TOP, AA(tha)/Stable, standalone credit profile of a+(tha)). It
also has higher profitability in comparison with TOP. PTTGC's operation and
diversification are much larger than that of IRPC Public Company Limited
(A(tha)/Stable, standalone credit profile of bbb+(tha)). In addition, it has a
stronger balance sheet, and wider operating profit margin.
KEY ASSUMPTIONS

Benchmark Brent crude price at USD41/bbl in 2020, USD48/bbl in 2021 and USD53/bbl in 2022 and USD55/bbl in 2023, with PTTGC's crude procurement cost adjusted for applicable premiumsMarket refining margin to weaken in 2020, due partly to the stock loss from lower oil prices, and to improve from 2021 onwards- Aromatic's and olefins' profitability to soften in 2020 and gradually improve thereafterUtilisation rate of refinery at 95% in 2020 reflecting the weak demand particularly on jet fuelTHB66 billion of capex over 2020-2023, including committed capex and maintenance costsDividend payout at 50% of consolidated net profitNo major new capacity expansion plan or acquisition during 2020-2023

RATING SENSITIVITIES
Developments That May, Individually or
Collectively, Lead to Positive Rating Action
The Outlook could be revised to Stable if FFO net leverage decreases to below 2.0x by 2022 on a sustained basisEvidence of stronger ties with PTT
Developments That May, Individually or
Collectively, Lead to Negative Rating Action
Expectation of FFO net leverage remaining above 2.0x by 2022 could lead to negative rating actionWeakened ties with PTT
BEST/WORST CASE RATING SCENARIO
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: PTTGC had outstanding
debt of THB112.8 billion at end-2019, of which THB10.2 billion matures within
12 months - this consists of THB8.2 billion of the current portion of long-term
debt and THB2 billion of short-term borrowings from financial institutions,
most of which are due in 2H19. Liquidity is supported by unrestricted cash and
cash equivalent of THB24.9 billion, available uncommitted facilities of USD450
million, and inter-company borrowing and lending facilities with PTT of THB10
billion.
REFERENCES FOR SUBSTANTIALLY MATERIAL
SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used
in the analysis are described in the Applicable Criteria.
Additional information is available on
www.fitchratings.com

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