TRIS Rating Co., Ltd. has affirmed the company rating of TPI Polene PLC (TPIPL) at “BBB-” and has revised the outlook to “stable” from “positive”. The rating takes into consideration the increasing demand for cement in the domestic market in the medium to long term, the company’s strong position as the third largest cement producer in Thailand, and its position as the leader in low density polyethylene (LDPE) market in Thailand. However, these strengths are partially offset by the cyclical nature of both the cement and petrochemicals industries which cause the company’s operating performance to fluctuate, intense price competition in the domestic cement market, and the relatively high level of debt at floating interest rates.
The “stable” outlook reflects the expectation that the operating performance of TPIPL might not improve much in the near future due to the economic slowdown and delays in several public works projects. In addition, price competition among cement producers due to excess supply and relatively high raw material costs will cause the profit margin of the company to remain unsatisfactory. However, any significant changes in the company’s operating performance or a failure to complete its refinancing plan before the middle of 2007 will negatively impact its rating due to increased financial risk.
TRIS Rating reported that the total domestic consumption grew 7% from 27.1 million tonnes in 2004 to 28.9 million tonnes in 2005. However, TPIPL’s domestic cement sales declined slightly from Bt10,661 million in 2004 to Bt9,897 million in 2005.
Though its export sales volume grew around 32%, in line with the industry, the contribution from exports accounted for only 11%-12% of TPIPL’s volume and sales value. Its cement gross profit margin also declined sharply from 47% in 2004 to 35% in 2005. The declining profit margin was due to price cutting in the last two quarters of 2005 and increasing production costs, especially the rising price of coal. In 2005, the company’s capacity utilization rate for cement was around 92%, approximately 3% higher than the previous year. However, the company’s ability to expand the cement production line was rather limited due to its current financial status and the ongoing dispute between TPIPL and its equipment suppliers, Krupp Polysius AG and Projecktall Industrieberatung GmbH, which is still under the court process. The operating performance of the plastic business was rather good in 2005 due to limited supply of LDPE in the domestic market and improving LDPE-ethylene and EVA-ethylene spreads. However, for its LDPE business, the company runs at almost full capacity and is not planning to expand in the near future.
TRIS Rating said that TPIPL’s adjusted total debt level declined from Bt30,671 million in 2004 to Bt28,992 million in 2005 and Bt27,624 million in the first quarter of 2006, a level that is still considered high. In addition, the company continues to be exposed to interest rate risk since all of its long-term debts are at floating interest rates. For 2005-2007, TPIPL has to pay interest at MLR +1.5% (for baht debts) and LIBOR +3% (for foreign debts). Increasing interest expenses, coupled with a decline in operating margin, caused TPIPL’s earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio to decline from 3.42 times in 2004 to 1.93 times in 2005. In addition, the company has to refinance approximately Bt16,000 million of debt that will come due at the end of 2007.
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Company Rating: Affirmed at “BBB-”
Rating Outlook: Revised to “Stable” from “Positive”