Fitch Affirms TASCO at #A-(tha)#/Stable and Withdraws Ratings

Stocks and Financial Services Press Releases Friday October 12, 2018 17:37
Bangkok--12 Oct--Fitch Ratings

Fitch Ratings (Thailand) Limited has affirmed Tipco Asphalt Public Company Limited's (TASCO) National Long-Term Rating at 'A-(tha)' and its National Short-Term Rating at 'F2(tha)'. The Outlook is Stable. Fitch has simultaneously chosen to withdraw TASCO's ratings for commercial reasons.

KEY RATING DRIVERS

Crude Supply Continuity Risk: Fitch thinks the risk of a disruption in TASCO's crude supply remains high over the next 12-24 months as its refinery in Malaysia is likely to continue relying mainly on crude supply from Venezuela. We believe TASCO will still prefer Venezuelan crude, which the company says offers higher returns, even though it is exploring alternative sources. Fitch has factored in the supply interruption risk by taking a more conservative view on the company's international sales volume and profitability.

The Venezuelan supplier has faced operational and financial difficulties in addition to an international legal dispute, which limit its ability to supply crude oil to its customers. This caused several delays in crude shipments to TASCO, which had a material impact on the company's operating performance in 1H18. Crude supply for TASCO's asphalt refinery was reduced by half of the normal capacity in 1H18 and its international sales volume dropped by 51%. The situation is likely to improve in 2H18 as crude shipments resumed in late-July 2018.

Declining Profitability: Fitch expects TASCO's EBITDA margin to decline to 8%-9% in 2018-2019 from 12% in 2017 (1H18: 9%) due to higher crude costs and occasional supply interruptions. TASCO would have to replace the asphalt it refines with trading products or use alternative crude if supply continues to be disrupted, both of which generate lower profit margins. Fitch expects benchmark Brent crude to rise to an average of USD70 per barrel in 2018 and USD65 per barrel in 2019 from the average of about USD55 per barrel in 2017.

Credit Metrics to Remain Sound: Fitch expects TASCO's FFO adjusted net leverage to temporarily surge to 2.3x in 2018 (1H18: 2.0x) and gradually fall to 1.8x in 2019 and about 1.1x in 2020, given our assumption of no major capex for refinery expansion. TASCO's high leverage in 2018 is driven by weakened operating cash flows, which is largely due to the delay in crude supply. Fitch expects TASCO to postpone its refinery expansion plan until the supply risk is properly managed.

Domestic Market Leader: TASCO's ratings are underpinned by its leading position in Thailand's asphalt market. TASCO maintained its domestic market share by sales volume of roughly 38%, according to the company, even during the tough period in 1H18. It also has strong positions in overseas markets, particularly in Indonesia and Vietnam. Although international sales volume dropped significantly on the production shutdown and soft demand in some of its key markets in 1H18, we expect TASCO to maintain its market position and regain its sales as it resumes normal production in 2H18.

TASCO's competitiveness is supported by its wide product portfolio across conventional and premium segments, strong logistics ability via its nine owned vessels and 300-truck fleet, and expertise in pavement services.

Geographical Diversification: TASCO operates more than 40 production plants in eight countries in Asia, including a 30,000 barrel-per-day refinery in Malaysia. Overseas asphalt sales accounted for around 65% of the total in 2017, primarily to China, Indonesia, Vietnam, Malaysia, and Australia. The company has also expanded its footprint to Laos and the Philippines during the last 12 months. Fitch believes the diverse revenue stream will help smooth TASCO's cash flow across business cycles.

Exposure to Volatile Oil: TASCO is vulnerable to fluctuations in raw material prices, mainly that of crude oil, although its asphalt product prices may not be directly correlated with crude oil price movements in the short term. The long lead time from transporting crude from South America to its Malaysian asphalt refinery exposes TASCO to a mismatch between refined product prices and crude-oil prices. However, the company partly mitigates crude-oil price risk by using hedging tools to protect its margins.

DERIVATION SUMMARY

TASCO is smaller than peers in the building-materials sector, including The Siam Cement Public Company Limited (SCC, A+(tha)/Stable) and Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), and has a lower EBITDAR margin. The cement business gives SCC and SCCC better earnings visibility and wider end-user segments compared with TASCO's asphalt business. SCC is also exposed to volatile oil prices in its chemicals business, but it has a superior business profile and more diversified businesses. The cement peers' stronger business profiles warrant higher ratings than for TASCO.

TASCO has significantly smaller operating scale than oil refiner IRPC Public Company Limited (IRPC, A-(tha)/Stable, standalone BBB+(tha)). However, TASCO's business is more stable and generates higher margins. It also has lower financial leverage, which results in a higher rating than IRPC's standalone rating. IRPC's National Long-Term Rating incorporates a one-notch uplift to reflect linkage with its single largest shareholder, PTT Public Company Limited (AAA(tha)/Stable).

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Sales volume for asphalt products to decline in 2018 and recover in 2019 and gradually increase thereafter (2017: 11% decline)
  • Revenue to decrease by 13%-15% in 2018, then recover by about 8%-10% in 2019 (2017: 18% growth)
  • Overall gross margin to fall to 9%-11% in 2018-2019
  • Dividend payout to increase to above 60% in 2018-2019
  • Capex and investments of about THB0.5 billion-0.8 billion a year in 2018-2019, barring major capacity expansion.
RATING SENSITIVITIES
No longer relevant as the ratings have been withdrawn.
LIQUIDITY

Manageable Liquidity: TASCO had outstanding debt of THB4.5 billion at end-June 2018 with THB4.4 billion due to mature within 12 months, which were mostly short-term revolving facilities used to finance working capital. TASCO's inventory increased to THB4.8 billion at end-June 2018, from THB3.9 billion at end-2017. Liquidity is partly supported by cash on hand of THB0.7 billion and strong access to bank funding.


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