Key Rating Drivers
Strong Market Position: SCCC’s ratings are underpinned by its market position as Thailand’s second-largest cement producer by market share, with a stable market share of 27%. Fitch expects the company to maintain its market position and its healthy EBITDA relative to its peers over the next five years due to its strong brands in cement and ready-mixed concrete (RMC).
Healthy Financial Profile: Fitch expects SCCC’s leverage, measured by FFO adjusted net leverage, to increase due to high capex, but remain below 1.5x in 2015-2016 (2014: 0.8x), which remains consistent with its ratings. SCCC’s strong credit metrics have supported its ratings and provide sufficient headroom to accommodate the company’s growth strategies over the next two years.
Moderate Earnings Growth: Fitch expects the company’s revenue growth in 2015 to continue at 2014’s mid-single digit pace (2014: 6%). However, EBITDA margin is likely to decrease to 22%-23% (2014: 24%) due to pricing pressure from additional supply. Fitch expects SCCC’s revenue growth and margins to improve in 2016, in line with the overall economic improvement and increases in the government’s infrastructure spending.
Vulnerable to Energy Prices: SCCC’s EBITDA margin is highly sensitive to energy costs, mainly coal and electricity. Fuel and electricity costs generally accounted for more than 70% of total production costs. However, coal prices decreased in 2014 and are likely to continue falling in 2015, according to the World Bank.
Single-Market Concentration: SCCC’s ratings are constrained by a lack of geographical diversification. Most of its earnings come from cement and related products sold in Thailand. Excess capacity, including capacity it will add in 2015, is likely to be gradually absorbed by growth in cement demand in the medium term. However, additional capacity could be created by debottlenecking of existing kilns, along with the construction of new kilns by major local producers.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Improving domestic cement sales volume but lower average selling prices in 2015-2016;
- Exports’ share of total sales to be maintained in 2015 and to decline in 2016 due to higher domestic sales;
- EBITDA margin to reduce to about 22%-23% in 2015 and slightly improve in 2016;
- Capex at about THB3.0bn-5.0bn a year in 2015 and 2016; and
- Maintaining high dividend payout ratio of about 70%.
Rating Sensitivities
Positive rating action is unlikely over the medium term, given the company has no definite regional expansion plans. However, future developments that may, individually or collectively, lead to positive rating action include:
- a significant increase in operating scale or revenue diversification, which help improve SCCC’s business profile while maintaining its FFO-adjusted net leverage below 1.25x
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- a large decrease in profit margins, a large debt-funded investment, or higher-than-expected dividend payouts, which lead to an increase in FFO-adjusted net leverage to over 2.25x on a sustained basis