Thailand's PTT Has Sufficient Headroom to Support Acquisitions

Tuesday 20 July 2021 09:11
Thailand-based PTT Public Company Limited's (BBB+/AAA(tha)/Stable) petrochemical and power acquisitions, which form part of its energy transition plan, will enhance the group's geographic and business diversification, Fitch Ratings says. The acquisitions will drive up PTT's financial leverage over the next two years, but the current low financial leverage should provide headroom to absorb the investments.

PTT's subsidiary, PTT Global Chemical Public Company Limited (PTTGC, AA+(tha)/Negative), plans to acquire a 100% stake in Allnex Holding GmbH - a leading global industrial coating resin producer - for EUR4.0 billion (about THB148 billion). This should expand PTT's downstream chemical business and increase its geographical diversification. Allnex has 33 manufacturing sites worldwide, with sales across the Americas (2020: 24% of sales), EMEA (40%) and the Asia Pacific (36%). PTTGC expects the transaction to boost sales volume growth by about 5% in 2022 and add EBITDA of about EUR400 million-500 million. The acquisition should also broaden PTTGC's portfolio of high-value products, add stability to its earnings and enhance its EBITDA margin, as Allnex's EBITDA margin is higher than that of PTTGC.

Another PTT subsidiary, Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable), plans to acquire a 41.6% stake in solar power projects in India for THB14.8 billion and a 25.0% stake in wind power projects in Taiwan for USD500 million (around THB16 billion). This will expand its renewable portfolio and is in line with PTT's target to add 8,000MW of renewal power generation by 2030. Cash flow from the projects will be in form of dividends. We expect dividends to be low for projects in India, as the projects aim to maintain operating cash flow for capacity expansion. We believe Indian solar power projects are riskier than PTT group's existing power businesses, but their small size relative to the group's overall asset base should limit the impact on PTT business risk profile.

The solar projects in India consist of 1,392MW of power plants in operation and 2,352MW under construction, with expected operation in 2021-2022. The projects in Taiwan are wind power plants with a total capacity of 595MW, of which 96MW will be operational in 2022 and the remainder in 2023-1Q24.

The acquisition costs will increase PTT's FFO net leverage by about 0.8x in 2021, without taking into account any earnings from the acquired assets. We expect FFO net leverage to increase to 2.5x-2.7x in 2021-2022 (2020: 1.8x), which is still below 2.8x - the level above which we would consider lowering its Standalone Credit Profile (SCP) of 'bbb+', although headroom will be limited after the acquisitions. PTT will provide shareholder loans to PTTGC and GPSC to support the acquisitions, but these will be incorporated in the consolidated financial profile.

PTT's ratings will remain equalised with those of the Thailand sovereign (BBB+/Stable) under Fitch's Government-Related Entities Rating Criteria if the SCP weakens, provided our assessment of PTT's strong likelihood of receiving state support under the criteria remains unchanged.

Source: Fitch Ratings