The ratings reflect SCCC's business profile as a small regional cement manufacturer with a solid market position in its core operating markets; it is the second-largest cement producer in Thailand and south Vietnam, and the largest cement producer in Sri Lanka. We expect the company to continue to generate positive free cash flow, despite rising capex and near-term pressure from elevated energy costs.
KEY RATING DRIVERS
Slow EBITDA Recovery: We expect SCCC's EBITDA to remain muted at around THB7.5 billion in 2022 on elevated energy costs, and to recover to around THB8.5 billion in 2023 as costs moderate and demand improves. We forecast high-single-digit revenue growth in the next two years, as we expect fewer disruptions in key markets from Covid-19 pandemic-related movement curbs as vaccinations rise. The EBITDA margin is likely to remain pressured at 17% in 2022, before recovering to 18% in 2023 (2021: 18%, 2020: 22%).
We believe SCCC's margin will continue to benefit from cost management initiatives, such as forward-booking of prices and volumes of key manufacturing inputs, fixed-cost optimisation, reducing clinker usage, and increasing alternative fuels.
Uneven Recovery Across Markets: The bulk of SCCC's cash flow stems from Thailand, with Vietnam and Sri Lanka accounting for around 16% and 14%, respectively, of EBITDA in 2021. We expect a fragile recovery in Thailand due to limited private-sector construction activity, with only public infrastructure driving cement demand in 2022. However pent-up demand in Vietnam supports a rebound in cash flow as the country moves away from its zero-Covid strategy.
In Sri Lanka, SCCC is well positioned to benefit from demand substitution for domestic cement given the shortage of imported cement amid the country's weak external finances. We see only a limited threat of an outright ban on imported clinker in the next 12 months, given clinker's role as a key input into the domestic manufacturing of cement, which is essential to support domestic construction activity.
Vulnerable to Energy Prices: SCCC's EBITDA margin is highly sensitive to thermal coal and electricity costs, which account for more than 60% of its total production costs. We expect thermal coal prices to remain elevated in 2022 from disruption in the demand-supply balance across key markets, although prices should be lower than in 2021. SCCC has contracted around 50%-60% of its expected thermal coal volume in 2022, with 30%-40% of the prices fixed with key suppliers.
Leverage to Improve: We expect SCCC's net debt/EBITDA to remain at around 2.0x in 2022 on account of profitability pressure from energy costs and only a gradual improvement in demand. However, leverage should improve to 1.5x in 2023 and around 1.0x in 2024, supported by rising positive free cash flow generation. This provides the company with headroom for capex, including for possible clinker-rationalisation projects and capacity expansion. We have not included these in our base case, as the expenditure remains uncommitted.
Market Position, Geographical Diversification: SCCC is Thailand's second-largest cement producer. SCCC has defended its market position against increasing supply and heightened competition over the past several years with the help of its strong brand and pricing flexibility. SCCC also has a strong market position in Sri Lanka, as the largest domestic manufacturer and sole clinker producer. It is also south Vietnam's second-largest operator. Revenue from regional operations and exports accounted for nearly 50% of 2021's revenue.
DERIVATION SUMMARY
SCCC has a weaker business profile than its closest domestic industry peer, The Siam Cement Public Company Limited (SCC, A+(tha)/Stable), given SCC's leading domestic market position and diversification across geographies and businesses. SCC's stronger business profile warrants a one-notch higher rating, notwithstanding SCCC's lower financial leverage.
SCCC is rated at the same level as the Standalone Credit Profile (SCP) of SCG Packaging Public Company Limited (SCGP, A+(tha)/Stable; SCP: a(tha)), a leading producer of paper-based packaging in south-east Asia, but higher than the SCP of Global Power Synergy Public Company Limited (GSPC, A+(tha)/Stable; SCP: a-(tha)), Thailand's major private power-generation company.
SCCC's cash flow is more susceptible to economic downturns compared with that of SCGP and GPSC, because of exposure to construction and real estate end-markets. SCGP operates in more defensive sectors that support steady cash flow and underpin its higher leverage threshold than SCCC for the same rating. GPSC's elevated leverage following its aggressive debt-funded investments constrains its SCP at one-notch below SCCC's rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to increase by around 3%-8% a year in 2022-2024, supported by rising product prices and a demand recovery in all operating markets (2021: -1%)
- EBITDA margin to stay below recent highs at around 17%-19% in 2022-2024 due to high input costs
- Capex of THB5.5 billion over 2022-2024
- Dividend payout ratio of 75%-85%
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- We do not expect an upgrade in the medium-term given SCCC's smaller operating scale compared with higher-rated peers.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- A significant weakening of operating cash flow, a large debt-funded investment or dividend payment to shareholders, keeping net debt/EBITDA at above 2.3x (2021: 2.1x) or fund flow from operations net leverage at above 2.5x (2021: 2.3x).
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: SCCC had THB10.3 billion of debt maturing within the next 12 months as at end-2021, consisting of THB3.0 billion in short-term loans and revolving credit facilities for working capital and THB7.0 billion of its long-term loan, which was repaid in January 2022. SCCC's liquidity is supported by cash on hand of THB9.7 billion and available committed credit facilities of around THB9.8 billion at end-2021. The company also has a record of proactively managing its liquidity and refinancing requirements, supported by access to local debt-capital markets and bank funding.
Source: Fitch Ratings