Fitch Revises Outlook on Siam Cement to Negative; Affirms at 'A+(tha)'

Friday 17 June 2022 10:20
Fitch Ratings (Thailand) has revised our Outlook on The Siam Cement Public Company Limited (SCC) to Negative from Stable. The agency has also affirmed SCC's National Long-Term Rating and senior unsecured rating at 'A+(tha)' and its National Short-Term Rating at 'F1(tha)'.

At the same time, Fitch has assigned a senior unsecured rating of 'A+(tha)' to the proposed THB300 billion medium-term note programme (MTN). The MTN programme, which allows for the issuance of senior unsecured baht notes, is rated at the same level as SCC's senior unsecured debt as they will constitute the direct, unconditional, unsubordinated and unsecured obligations of SCC.

The Negative Outlook reflects elevated risks associated with high leverage over the next 12-18 months. Fitch expects its large capex plan in 2022, amid weaker cash flow from the chemicals business and an inflationary cost environment, could result in net debt/EBITDA staying above 3.5x, a level that is no longer consistent with its rating, by end-2023.

Deleveraging Challenge: Fitch expects net debt/ EBITDA to reach 4.5x-5.0x by end-2022 (end-March 2022: 3.1x), driven mainly by its high capex plan of up to THB85 billion, the majority of which is for the Long Son Petrochemicals (LSP) project in Vietnam which will start generating cash inflow in 2023. The high inflationary operating environment creates uncertainty for the pace of its deleveraging target. Weaker-than-expected business recovery and LSP's earnings contribution, as well as higher-than-expected capex without equity injection, could lead to negative rating action.

SCC's deleveraging could be faster than our expectation if its business spin-off plan is completed by end-2022 or early 2023. We have not factored any proceeds from the proposed IPO into our forecasts, as this is subject to market uncertainties and execution risk. SCC plans to spin off its chemicals business through the IPO of SCG Chemicals Public Company Limited (SCGC, A+(tha)/Negative). This was filed with the local Securities and Exchange Commission in April 2022.

Earnings Pressures: We expect EBITDA to decline by more than we had previously expected as the company is currently being pressured by inflated costs in all core businesses. We expect EBITDA to drop to THB60 billion in 2022 before recovering to THB73 billion in 2023 (2021: THB75 billion), against our previous expectation of THB73 billion and THB81 billion in 2022 and 2023, respectively.

High volatility on commodity raw materials and energy prices together with disrupted freight flow are likely to continue to suppress the EBITDA margin for the rest of 2022 (2022F: 10%, 1Q22: 9%, 2021: 14%). Fitch believes SCC's ability to pass on costs will grow, following stronger product demand and easing supply-chain disruption in 2023.

Improving Diversification: We expect revenue from outside Thailand - from overseas plants and exports - to rise over the medium term, especially when cash flow from the LSP plant begins in 2023. The project will be the first and largest petrochemical complex in Vietnam, and we expect it to support local polymer demand, most of which is now met by imports. SCC also exports to countries outside ASEAN, which accounted for 19% of sales in 2021, and we expect these sales to be diverted outside of Vietnam once the LSP plant is operational.

Leading Market Positions: SCC leads in each of its core businesses, including cement, ceramic tiles, downstream chemicals (mainly polyolefins and polyvinyl chloride), and packaging paper in Thailand as well as in several ASEAN countries. SCC's leading position in each product and the benefits from overall diversification help to mitigate some sector-specific risks.

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 and business diversification. These strengths are mitigated 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. PTTGC's one-notch higher Standalone Credit Profile than SCC reflects its more conservative financial profile. However, both SCC's and PTTGC's leverages have risen following their high capex and investments, and the Negative Outlooks reflect the risks associated with their deleveraging capacities.

Fitch's Key Assumptions Within Our Rating Case for the Issuer

  • Consolidated revenue to rise by 16% in 2022 and around 10% in 2023 (2021: +33%, 1Q22: +25%), supported by higher product selling prices, demand recovery in several product segments, and capacity expansion.
  • EBITDA margin to narrow to 10%-11% in 2022-2023 (2021: 14%, 1Q22: 9%), assuming lower chemicals spreads and inflated raw materials and energy costs for all business units;
  • Capex and investment plan of THB117 billion over 2022-2023.
  • Dividend payout ratio of around 40%-50% in 2022-2023

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • The rating Outlook could be revised to Stable if SCC's net debt/EBITDA falls to below 3.5x by 2023, provided it has stronger-than-expected operating cash flow or cash inflow from the equity injection.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Net debt/ EBITDA above 3.5x for a sustained period.

Comfortable Liquidity: SCC has THB101 billion of debt maturing within the 12 months to end-March 2023, including working-capital facilities from banks of around THB56 billion, term loans from banks of around THB5 billion, and debentures of around THB40 billion. SCC's liquidity is supported by cash and Fitch-defined liquid investments of about THB81 billion as of end-March 2022, cash flow from operations of about THB40 billion-60 billion a year, and strong refinancing ability through the local debt-capital markets 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 committed credit facilities of THB64 billion at end-2021, including facilities for the LSP project of USD1.8 billion (around THB60 billion).

SCC is one of Thailand's largest industrial conglomerates, with EBITDA of THB75 billion in 2021. Its three core businesses are cement and building materials, chemicals and packaging. SCC holds the leading market position in all core products in Thailand and several ASEAN countries.

The principal sources of information used in the analysis are described in the Applicable Criteria.

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Source: Fitch Ratings