The affirmation reflects TOP's continued strong business profile in Thai refinery and petrochemical businesses. Fitch expects TOP's financial leverage to increase temporarily during the high investment periods in 2019-2022, then to fall to a level commensurate with its rating after the CFP commences full operation in 2023. The CFP investment is likely to improve TOP's business profile, increase its refining capacity and enhance its refining complexity and competitiveness.
KEY RATING DRIVERS
Temporary Rise in Leverage: Fitch expects the CFP to be approved at the August 2018 extraordinary general shareholder meeting. TOP's FFO adjusted net leverage is likely to rise to 3.0x-4.0x during the CFP construction period in 2020-2022 (2017: 0.1x), before falling to below 2.0x once the CFP commences full operation. TOP estimates the CFP to cost approximately USD4.8 billion and for commercial operations to commence in 1Q23.
TOP has also announced its plan to support its associate, Global Power Synergy Public Company Limited (GPSC) (A+(tha)/Rating Watch Negative), make a tender offer for the entire security of GLOW Energy Public Company Limited. Fitch estimates the acquisition will require an equity injection of around THB18.2 billion from TOP in 2019, which will be funded via cash, cash flow from operation and debt, and has incorporated this into its rating analysis.
Flexible Credit Terms: Fitch expects TOP to extend the credit terms of crude supply with its 49% shareholder, PTT Public Company Limited (AAA(tha)/Stable), which will help to preserve cash flow and support lower debt funding requirements during TOP's high investment period. PTT has a proven record of supporting its key subsidiary - as is evident from the extended crude credit terms for IRPC Public Company Limited (A-(tha)/Stable) in 2013-2018. We believe PTT will support TOP in the same way. We estimate that TOP will achieve cash inflow of up to USD550 million from the credit-term extension at crude prices of USD57.5-65.0 per barrel.
CFP Improves Business Profile: The CFP will increase TOP's refining capacity to 400,000 barrels per day, from the current 275,000 barrels per day, and help maintain the company's position as Thailand's largest refinery. Moreover, the upgrade will allow TOP to refine heavier crude oil, improve refining efficiency and increase yield of low sulphur high-margin middle distillates. This should put TOP in a good position to benefit from the pending International Maritime Organization's fuel-specification changes toward more environmentally friendly fuel.
TOP has a competitive advantage as the operator of the country's most complex and largest crude refinery, which accounted for 29% of Thailand's refining capacity in 2017. TOP's complex facilities and high utilisation rate enhance its cost competitiveness, provide crude-sourcing flexibility and allow the company to optimise production for higher-grade and higher-margin products better than its domestic peers.
Business Diversification: TOP's expansion into aromatics, lube base oil, solvents and other support businesses, such as petroleum logistics, power generation and services, has helped to diversify its revenue sources and reduce margin volatility. Higher revenue from a more stable power business, driven by the full-year operation of TOP's two small power producers, should partly offset cash flow volatility of its core refining business. However, EBITDA from the power business was still small, at around THB2.8 billion - or around 8% of total EBITDA - in 2017.
Highly Cyclical: TOP's credit profile is restrained by the inherent cyclicality of its businesses and the concentration of its production facilities at one site. The volatility of refining margins, oil prices and working-capital requirements could significantly affect its earnings and cash-flow generation. TOP is also exposed to market-concentration risk, as the majority of its sales are to its major shareholder, PTT. This is mitigated to some extent by PTT's strong credit profile and position as Thailand's leading oil marketing and trading company.
Linkages with PTT: TOP's National Long-Term Rating incorporates moderate linkage with PTT, resulting in a one-notch uplift from its standalone credit profile. TOP is PTT's largest refinery and its refined product sales to PTT represent around one-third of PTT's oil-retailing business sales. Furthermore, PTT provides commercial support to TOP, including a 10-year product offtake and crude-supply agreement and inter-company borrowing and lending contract.
DERIVATION SUMMARY
TOP's standalone credit profile of 'A+(tha)' reflects the size and complexity of its production facilities. Its business profile is strong relative to Thai downstream oil and gas peers. Its financial leverage will be temporarily high during the CFP construction period but will fall once the project is fully operational. TOP's refinery is more complex and larger than that of IRPC (standalone credit profile: BBB+(tha)). TOP also has a stronger balance sheet and better operating profit margin due to its higher utilisation rate at its plant. However, TOP has a smaller operating scale and less integration into petrochemicals than PTT Global Chemical Public Company Limited (AA(tha)/Stable, standalone credit profile: AA-(tha)), which also has better profitability due to its large petrochemical operations that have higher operating margins.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Benchmark Brent crude price at USD70.0 per barrel in 2018, USD65.0 in 2019, USD57.5 in 2020 and thereafter, with TOP's crude procurement cost adjusted for applicable premiums
- Gross refinery margin to soften in 2018-2019 and stay flat before improving after the CFP start-up
- Refinery utilisation rate of 101%-105% in 2018-2022 and 95%-100% after CFP start-up
- Aromatic's profitability to improve gradually in 2018-2019 and to stay flat thereafter
- Lube base's profitability to decrease gradually in 2018-2019 and to stay flat thereafter
- USD5.4 billion capex over 2018-2022, including the CFP, committed capex, investment and maintenance costs
- Equity injection of THB18.2 billion to support GPSC's investment in 2019
- Extension of crude supply credit term with PTT from 30-days to 90-days in 2019 and thereafter
- 40% dividend payout ratio
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- Proof of stronger ties with PTT.
- Positive rating action on TOP's standalone rating is not probable in the medium term in light of its large capex associated with the CFP.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- Thinner-than-Fitch-expects refining margins and petrochemical spreads or an increase in debt-funded investments resulting in FFO adjusted net leverage peaking at above 4.0x during the high CFP investment period and above 2.0x for a sustained period after the CFP commences full operation in 2023.
- Evidence of major CFP execution failures, including large cost overruns or a severe delay in project completion.
- Weakened ties with PTT.
LIQUIDITY
Strong Liquidity: TOP has strong liquidity that is supported by non-restricted cash and cash equivalents of THB79.3 billion as of end March 2018. This is more than adequate to cover its THB6.1 billion debt maturing within the next 12 months. Fitch expects its liquidity to be reinforced by positive free cash flow in 2018, a THB2.0 billion credit facility from PTT, THB11.5 billion in committed facilities from financial institutions and its ability to raise funds in the capital market. TOP also has a comfortable debt maturity profile, with an average debt life of 10.5 years.