At the same time, Fitch has assigned the company's new senior unsecured debentures of up to THB25bn due in 2021 a National Long-Term Rating of 'A(tha)'. The proceeds of the new debenture will be used to refinance existing debt and fund the company's future capex and investments. The notes are rated at the same level as SCC's National Long-Term Rating as they constitute direct, unsecured, unconditional and unsubordinated obligations of the company.
The Positive Outlook reflects our view of SCC's improving business profile with its regional expansion and investment, which will support further improvements in SCC's credit profile once they generate meaningful cash flows. SCC's financial profile has also improved, driven by robust cash generation from SCC's chemicals business, which benefited from lower oil prices. Fitch will monitor the sustainability of the chemicals business' strong performance.
KEY RATING DRIVERS
Balance Sheet to Remain Strong: Fitch expects SCC to maintain its financial leverage (FFO adjusted net leverage) at below 2.8x, although the company is still expanding with planned capex and investments of THB200bn-250bn over the next five years. The robust chemicals performance has led to improvements in free cash flow, which helped to accelerate deleveraging to 2.0x at end-2016. This should provide some headroom for future capex.
Well-Diversified Businesses: Fitch expects SCC's regional expansion in recent years to enhance diversification and profitability over the long term. Cement capacities outside of Thailand are likely account for 25% of total cement capacity in 2017, compared with 5% in 2014. Furthermore, the operations in those countries should generate higher profit margin than exports from Thailand.
SCC's ratings are also supported by the diverse sources of revenue from its core businesses – cement and building materials (CBM), chemicals, and packaging – which have helped smooth its operating cash flow and mitigated some sector specific risks. For example, in 2015-2016, benefits from the upturn in chemicals more than offset the muted local demand for cement.
Leading Market Position: SCC is one of Thailand's largest conglomerates. Its ratings are underpinned by its leading market position in its core products. SCC has the largest capacity and market share in cement, ceramic tiles, downstream chemicals (polyolefins and PVC), and packaging paper in the domestic market and several south-east Asian countries. Fitch expects SCC to generate EBITDA of THB75bn-80bn a year with margin of 15%-17% in 2017-2019. The chemicals business is likely to remain a key earnings contributor in 2017, as the recovery in the CBM business is likely to strengthen only in 2018.
Product Cyclicality: The ratings also take into account SCC's inherent exposure to the cyclicality of the chemicals and CBM businesses. Furthermore, SCC has a lack of pricing influence because the bulk of its products are commodities, the prices of which are determined by global demand and supply.
DERIVATION SUMMARY
SCC has the strongest business profile relative to the peers in Thailand's building materials sector, including Siam City Cement Public Company Limited (SCCC, A(tha)/RWN) and Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable). SCCC and TASCO both have single business lines, and SCCC has lower market share in the cement market in Thailand than SCC. In term of financial profile, SCC's financial leverage is higher, but this is counterbalanced by its significantly larger operating scale and diversification across businesses.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to grow at about 10% in 2017 largely from the chemicals business, and about 5% in 2018 driven by the CBM segment
- EBITDA margin to reduce to 15%-17% in 2017-2018
- Capex of THB50bn-60bn per year in 2017-2018
- Dividend payout ratio between 40%-50%
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to positive rating action:
- A meaningful cash-flow contribution from regional operations while maintaining the FFO-adjusted net leverage at below 2.8x.
Future developments that may, individually or collectively, lead to negative rating action:
- Failure to meet the above positive rating guidelines could lead to the revision of Outlook back to Stable.
LIQUIDITY
Comfortable Liquidity: Its liquidity position is supported by cash and liquid investments (Fitch defined) of about THB39bn at end-2016, strong cash flow from operations of above THB50bn a year, and strong refinancing ability through local debt-capital markets and bank funding. At end-2016, total debt was THB194bn, of which 86% was baht-denominated senior unsecured debentures. About 34% of total debt will mature in the next 12 months.
FULL LIST OF RATING ACTIONS
The Siam Cement Public Company Limited
- National Long-Term Rating affirmed at 'A(tha)'; Outlook revised to Positive from Stable
- National Short-Term Rating affirmed at 'F1(tha)'
- National Long-Term Rating on senior unsecured debentures affirmed at 'A(tha)'
- National Long-Term Rating on new senior unsecured debentures amounting to THB25bn assigned at 'A(tha)'