In addition, Fitch has assigned SCC’s new senior unsecured debentures No.1/2012 due 2016, amounting up to THB25bn, a National Long term ‘A(tha)’ rating. The proceeds from the new issue will be used to refinance SCC’s maturing debentures and for business expansion.
The Outlook revision reflects weaker-than-expected profitability driven mainly by weak chemical product-to-feed margins. The difficult operating environment for chemicals is likely to depress SCC’s EBITDA margin and delay deleveraging in 2012-2013. As a result the prospect for rating upgrade over the next 12-18 months has decreased.
SCC’s ratings are supported by its well-diversified revenue sources in the chemical, cement, paper and building material businesses. Its leading position in the domestic cement and paper businesses should support SCC’s cash flow generation as the operating environment for chemicals remains difficult in 2012. Product diversification within the chemical division also helps alleviate risk from demand contraction in any particular chemical chain.
Fitch expects SCC’s EBITDA margin to drop further in 2012 due to likely weakening of chemical product margins. The healthier profitability of cement, paper and building material businesses should help it maintain EBITDA margin in high-single-digits in 2012. SCC’s EBITDA margin should gradually improve alongside an upturn of the chemicals industry in 2013.
SCC’s capex, excluding large business acquisition, is likely to be about THB30bn-THB40bn per year during 2012-2013. Despite a more challenging operating environment, Fitch expects SCC to maintain its financial leverage that is commensurate with its current ratings.
SCC’s ratings are constrained by its exposure to the cyclicality of the chemical and paper sectors and end-user sectors of cement and other building material products. In addition, the company’s earnings are vulnerable to high energy prices. Large excess capacity of domestic cement also leads to occasional price competition which could erode SCC’s profitability. Limited pricing power in commodity cement, chemical and paper also temper SCC’s profitability, particularly during a downcycle.
Fitch may consider a positive rating action if there is a significant increase in cash flow generated from regional operations; large improvement in the EBITDA margin; or if the net adjusted debt to EBITDAR (including dividend from associates) falls below 2.5x on a sustained basis. Conversely, the ratings may be negatively affected by EBITDA margin deterioration together with a decline in EBITDA, a prolonged chemicals downturn or aggressive acquisition which results in net adjusted debt to EBITDAR (including dividend from associates) over 3.5x on a sustained basis.