PTL's rating reflects its leading position in the polyester (PET) film business in south-east Asia, the defensive end-uses of its products, geographically diversified cash flows and a strong financial profile.
This is counterbalanced by the commoditised nature of most of PTL's standard films, which causes volatility in selling prices in a fragmented industry, and its small operations compared with that of higher-rated peers.
KEY RATING DRIVERS
Leading PET Film Producer: PTL's parent, Polyplex Corporation Limited (Polyplex Group), is one of the world's leading biaxially oriented polyethylene terephthalate film producers, with about 5%-7% share of the thin PET film market by sales. The group's production capacity is comparable with that of global producers, such as Toray Advanced Film Co., Ltd. and Mitsubishi Polyester Film Inc, although its peers are diversified across other products. Somewhat less price-sensitive specialty films make up a smaller share of PTL's portfolio compared with competitors.
Geographically Diversified Operations: PTL has four manufacturing facilities in three key markets - Thailand and Indonesia (Asia), the US (North America) and Turkey (Europe). This mitigates seasonal demand in different continents and operational risk from manufacturing disruptions. The proximity of production facilities to end-markets also reduces logistical costs, transport disruptions and the impact from trade barriers, particularly in net importer regions such as North America and Europe.
Standard Film Exposure: PTL is exposed to the volatility in market prices and faces intense competition, particularly in standard films, which accounted for 61% of its total sales in the nine months of the financial year ended March 2022 (9MFY22). Revenue from value-added films will continue to increase, but we expect PTL's products to remain dominated by standard films over the next two years as the company ramps up new standard film capacity in Indonesia and the US.
Increasing High-Value Products: PTL's EBITDA per kg (excluding resins) continued to improve over the past four years to THB20 in 9MFY22 from THB13 in FY18. This was mainly supported by an increase in value-added products to 39% of revenue in 9MFY22 from 28% at FYE18, and rising production at its highly efficient Indonesian plants to around 16% of total sales in 9MFY22. Fitch expects EBITDA per kg to moderate in FY23 due to a higher mix of lower-margin standard films, but it should remain strong relative to FY19-FY20.
Revised Parental Impact: We have reassessed the impact of parent Polyplex Group on PTL's rating, following our revised Parent and Subsidiary Linkage Rating Criteria. We now assess PTL's credit profile to be in line with that of its parent, instead of weaker, and therefore Polyplex Group's credit profile no longer has any bearing on PTL's rating. We assess the parent's standalone credit profile (SCP) by proportionately consolidating PTL's financials to reflect Polyplex Group's 51% stake.
New Capacity Supports Growth: Fitch expects PTL's EBITDA to increase by around 14% in FY23, supported by the capacity expansion and continued demand growth from packaging and industrial segments. PTL started the operations of its new 60,000 tonne per annum (tpa) biaxially oriented polypropylene film capacity in Indonesia in December 2021, an 18% increase. PTL also plans to add around 50,000 tpa of film capacity, or a 13% increase, to the US plants in FY24.
Healthy Demand: Around 67% of PTL's revenue is from consumer packaging for food and beverage, personal care and health and hygiene products, which have defensive demand across economic cycles. Growth from the packaging business could normalise in FY23, while demand from industrial sectors for electrical and electronic, and building and construction applications is likely to grow strongly, driven by an economic recovery. This should support PTL's continued growth and reduce its high concentration in the packaging business.
Strong Credit Metrics: We expect PTL's low financial leverage with net debt/EBITDA of 0.2x at end-December 2021 to provide the company with high rating headroom to support its committed capacity investments in FY23 and a slower ramp-up in operating cash flows than our expectations. We forecast net debt/EBITDA to rise to 0.6x in FY23 before dropping to around 0.1x in FY24 after the new US plant starts its operations.
DERIVATION SUMMARY
PTL's business profile is moderate relative to Thai downstream oil and gas, chemical and manufacturing peers, while its financial profile is stronger.
Both PTL and Eastern Polymer Group Public Company Limited (EPG, A-(tha)/Stable) operate in the polymer and plastic-product business, but focus on different end-markets. EPG's operations are less geographically diversified and its scale is significantly smaller than that of PTL. However, EPG serves more end-user segments and its products cater directly to consumer applications, making its cash flows more stable than PTL's, offsetting its smaller scale. Both companies have similar leverage and therefore are rated the same.
PTL's business and financial profiles are comparable with those of KCE Electronics Public Company Limited (A-(tha)/Stable), which is one of the 10 largest automotive printed circuit board (PCB) makers in the world. KCE focuses on the niche segment of automotive PCBs, which has higher barriers to entry. However, PTL has more geographically diversified operations and a broad customer base. Both companies have low funds from operations net leverage of below 1.5x. The ratings are therefore the same.
PTL's business profile is comparable with that of HMC Polymers Company Limited (A-(tha)/Stable, SCP: bbb+(tha)) as they have leading market positions in south-east Asia. However, PTL has greater geographical diversification and a stronger financial profile, leading to a higher rating than HMC's SCP. HMC's final 'A-(tha)' rating includes a one-notch uplift to reflect the moderate support incentives of its stronger parent, PTT Global Chemical Public Company Limited (AA+(tha)/Negative).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Revenue to increase by about 33% in FY23, supported by volume growth from new capacity and higher selling prices due to an increase in crude oil prices
- Operating EBITDA of around THB5.7 billion in FY23 (9MFY22: THB3.5 billion)
- Cumulative capex of about THB4.9 billion in FY23-FY24 mainly for capacity expansion in the US
- Dividend payout of 40% of net income
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- We do not expect an upgrade in the next two years due to PTL's smaller EBITDA scale and greater cash flow cyclicality than higher-rated peers;
- Over the longer term, a significant and sustained increase in EBITDA scale and a sustained higher share of specialty products that can support more stable cash flows could lead to an upgrade.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Lower operating cash flow or higher debt-funded investments, leading to total net debt/EBITDA above 2.0x on a sustained basis;
- Deterioration of the EBITDA margin to below 15% on a sustained basis (9MFY22: 23%).
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: The company had a large amount of cash on hand of THB2.6 billion at end-December 2021, against THB1.4 billion in debt maturing in the next 12 months. PTL also has available uncommitted working-capital facilities of around THB3 billion and a USD25 million term loan facility (THB800 million) to support the US capacity expansion.
ISSUER PROFILE
PTL is one of the leading manufacturers of polyester film with diversified manufacturing plants in Thailand, Indonesia and Turkey.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings