Fitch Assigns First-Time 'A+(tha)’ Rating to Thailand’s GPSC

Wednesday 25 January 2017 11:37
Fitch Ratings (Thailand) Limited has assigned Global Power Synergy Public Company Limited (GPSC) a first-time National Long-Term Rating of 'A+(tha)'. The Outlook is Stable.

KEY RATING DRIVERS

Low Volume Risk, Strong Counterparties: Most of GPSC's revenue is derived from contracted power and steam sales to customers with strong credit profiles, including Electricity Generating Authority of Thailand (EGAT) and affiliates of PTT Public Company Limited (PTT; AAA(tha)/Stable) – country's largest oil and gas company. These contracts provide GPSC with protection against volume risk as customers are required to off-take at least 75% of contracted capacity.

Some Price Risk: GPSC's earnings from electricity sales to industrial users, including PTT's affiliates, are exposed to some price risk. Although there is an adjustment mechanism in place that takes into account changes to fuel prices, the tariff adjustment is largely based on the discretion of the regulator; there have been instances of slower-than-required tariff increases during periods of high fuel prices. In addition, the price of non-firm electricity volume sold to EGAT depends on the overall demand and supply condition of the electricity system.

Strong Earnings Growth: Fitch expects GPSC's EBITDAR to increase significantly to around THB4.5bn in 2018 from THB2.7bn in 2015 as new projects come online. Earnings growth is likely to be driven by two power projects - the second phase of IRPC Clean Power (IRPC-CP Phase 2) and the fourth unit of Central Utility Plant (CUP 4) - which are scheduled to commence operations during 2017 and 2018. These projects are likely to add around THB1.2bn of EBITDAR a year to GPSC.

High Investments: Fitch expects GPSC's free cash flow to be negative in 2016 and 2017 due to high investments in new power projects. Operating cash flows will continue to grow, but will be insufficient to cover capex and dividend payments during this period. Fitch forecasts GPSC's FFO-adjusted net leverage to increase to around 2.6x in 2017 from 0.2x in 2015, before falling to around 1.8x in 2018 and 1.4x in 2019 due to higher earnings from new projects; our assumptions include total capex and investments of THB10.2bn from 2017 to 2019.

Operational Linkages with PTT: The 'A+(tha)' National Rating assigned to the company incorporates the benefits of GSPC's linkages with the PTT group – specifically the strong counter-parties and high volume certainty, which contribute to a very strong business profile. The majority of GPSC's revenue and earnings are generated from PTT group. GPSC's contribution to PTT group's earnings and overall business profile is, however, minimal over the foreseeable future. We may consider reassessing the strategic linkages with PTT, if GPSC's contribution to PTT becomes significantly larger, which may lead to an uplift to GPSC's rating should we conclude that it may receive extraordinary support from PTT group.

DERIVATION SUMMARY

GPSC's business profile is strong relative to Thai national peers. Its earnings and operating cash flow profile are close to those of Bangkok Aviation Fuel Services Public Company Limited (BAFS; A+(tha)/Stable), which operates aircraft fuelling services at Thailand's major airports, and BTS Group Holdings Public Company Limited (BTS; A(tha)/Stable), the operator of the skytrain network in Bangkok. These companies have highly predictable and stable earnings due to low competition or the nature of contracts in the case of GPSC. GPSC's leverage profile is similar to BAFS's, but better than BTSG's; however, BTSG's ratings incorporate our view that its financial profile will improve over time as the company completes its large investments.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GPSC include:

- Proportionate consolidation of IRPC-CP's earnings, cash flow, cash and debt

- Strong earnings growth in 2016 mainly from higher volume sales of CUP1-3

- IRPC-CP Phase 2 and CUP4 to start their operations in 2017 and 2018 respectively

- Dividend received from associates and JVs of around THB500m-700m a year in 2016 and 2017 (2015: THB607m)

- Capex of THB2.8bn in 2016 and THB4.6bn in 2017; and committed equity injection in associates and JVs of THB2.8bn in 2016 and THB1.4bn in 2017

- 50% dividend payout ratio

RATING SENSITIVITIES

Future development that may, individually or collectively, lead to positive rating action

- Positive rating action is unlikely in the medium term as we do not expect GPSC's business profile to further improve significantly in the medium term.

Future development that may, individually or collectively, lead to negative rating action

- Weaker-than-expected earnings or higher-than-expected investments resulting in FFO-adjusted net leverage increasing to more than 2.5x on a sustained basis.

- A weakening of the business risk profile due to aggressive investments in projects with higher operating risks.

LIQUIDITY

GPSC's liquidity is strong. As of end-September 2016, the company had THB7.5bn of cash, which is enough to cover its THB1.6bn of debt, while its liquidity needs are fully supported by the available committed credit facilities of THB12.4bn.

FULL LIST OF RATING ACTIONS

GPSC

-National Long-Term Rating assigned at 'A+(tha)' with Stable Outlook