The proceeds from the proposed debentures No.2/2564, which are due 2025, will be used to refinance maturing debentures No.3/2560 due October 2021.
The proposed debentures are rated at the same level as SCC's National Long-Term Rating, as they constitute its direct, unsecured, unconditional and unsubordinated obligations and because SCC has limited secured and prior-ranking debt.
KEY RATING DRIVERS
Headroom to Fund Capex: We believe that SCC will be able to absorb its higher capex plan of THB80 billion-90 billion in 2021, while maintaining leverage within the 3.5x threshold for its 'A+(tha)' rating (end-March 2021: 2.0x). The majority of capex will be spent on the Long Son Petrochemicals (LSP) project in Vietnam, which should start generating cash flow from 2023, and several acquisitions in packaging business.
SCC had a strong performance in 1H21 due to wider petrochemical spreads than we anticipated as well as incremental earnings generation from the expanding packaging business and building-material products. This more than offset the moderation in the cement segment amid slower construction activity due to stricter pandemic-related movement restrictions in the region. This, together with an equity injection via the IPO of its subsidiary, SCG Packaging Public Company Limited (SCGP, A+(tha)/Stable), in 2020 have increased SCC's rating headroom.
Strong EBITDA Growth: Fitch expects SCC to generate EBITDA of THB70 billion-80 billion a year in 2021-2022, higher than the THB60 billion we previously forecasted, supported by healthy petrochemical spreads and expansion of the packaging business. We believe SCC will continue to benefit from increasing revenue from high-value-added products and its cost saving efforts across its operating segments; chemicals, cement and building materials, and packaging.
Improving Diversification: We expect cash flow to become significantly more diversified over the medium-term, particularly when the LSP project comes on stream in 2023. The project will be the first and largest petrochemical complex in Vietnam when commissioned, and we expect it to boost local polymer demand, most of which is now met by imports. SCC's diversification mitigates some sector-specific risks, such as volatile chemical-product spreads and the cement sector's reliance on domestic construction and housing.
Leading Market Positions: SCC is a market leader in each of its core businesses. It has the largest capacity and market share in cement, ceramic tiles, downstream chemicals, such as polyolefins and polyvinyl chloride, and packaging paper in Thailand as well as several south-east Asian countries. We expect revenue generation from outside Thailand, both from plants based overseas and exports, to increase over the medium term, especially when the LSP project comes online. SCC also exports to countries outside south-east Asia, which accounted for 16% of sales in 2020.
DERIVATION SUMMARY
SCC has a stronger business profile than its closest peer in Thailand's building-materials sector, Siam City Cement Public Company Limited (SCCC, A(tha)/Stable), in light of SCC's larger domestic cement market share, higher cash flow and greater geographic diversification. These strengths are offset by higher leverage than SCCC, driving only a one-notch higher rating for SCC.
SCC has a smaller chemicals business than PTT Global Chemical Public Company Limited (PTTGC, AA+(tha)/Negative, Standalone Credit Profile: aa-(tha)), Thailand's largest integrated refining and petrochemical operator. However, SCC has broader diversification across industries, which reduces its exposure to volatility in the chemicals industry. Nevertheless, PTTGC has a more conservative financial profile, resulting in a one-notch higher Standalone Credit Profile.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
-Revenue to rise by 10%-15% in 2021 and 3%-5% in 2022, driven by healthy demand and capacity expansion in the chemicals and packaging businesses.
-EBITDA margin of 15%-17% in 2021-2022 (2020: 16%, 1H21: 18%), although we believe chemical spreads will narrow in 2022.
-Capex of around THB150 billion over 2021-2022.
-Dividend payout ratio of around 40%-50% in 2021-2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- We do not expect positive rating action unless there is a significant profit contribution from the overseas expansion of its chemicals business; for instance, from the full operation of the LSP project.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO net leverage above 3.5x for a sustained period.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: SCC has THB93 billion of debt maturing within the 12 months to end-March 2022, including working-capital facilities from banks of around THB26 billion, term loans from banks of around THB17 billion and debentures of around THB50 billion. SCC's liquidity is supported by cash and Fitch-defined liquid investments of about THB110 billion as of end-March 2021, cash flow from operations of about THB60 billion a year and strong refinancing ability through the local debt-capital market and bank funding.
We expect SCC to rely on external funding for liquidity over the next two years due to its large capex. However, the company has secured bank loans for its major committed projects. It had long-term undrawn credit facilities of THB90 billion at end-2020, including facilities for the LSP project of USD2.9 billion (around THB86 billion).
ISSUER PROFILE
SCC is one of Thailand's largest industrial conglomerates and generated EBITDA of THB70 billion in the 12 months to end-March 2021. It is diversified across three core businesses, including cement-building materials, chemicals and packaging. SCC holds the largest capacity and leading market share in all core products in Thailand and a leading position in several south-east Asian countries.
Source: Fitch Ratings