The affirmation of SCC's National Long-Term Rating with Stable Outlook reflects Fitch's expectations that the company's credit profile will remain adequate in the next 12-18 months despite a challenging operating environment for its chemicals business, and aggressive capex and investments. Fitch expects SCC's large cash balance and strong operating cash flow to partly support a significant increase in capex in 2019 while sustaining funds from operations (FFO) adjusted net leverage at around 3.0x in 2019-2021 (2018: 2.2x). Consequently, we expect SCC's rating headroom will narrow significantly and therefore a significant increase in capex and investment beyond Fitch's expectation could affect the rating.
KEY RATING DRIVERS
Rising Capex; High Leverage: Fitch expects SCC's FFO adjusted net leverage to increase to about 3.0x in 2019-2021 (end-1Q19 and end-2018: 2.2x) due to increasing capex. SCC announced on 10 May 2019 that it will acquire a majority stake in a listed Indonesian packaging paper company, P.T. Fajar Surya Wisesa Tbk (Fajar). SCC plans to maintain its five-year capex and investment plan at around THB250 billion, of which 70%-75% is committed to four major chemical and packaging projects. The Fajar acquisition is expected to be completed in 3Q19 for a potential cost of about THB21 billion.
Strong Operating Cash Flow: SCC's FFO is likely to remain strong at around THB60 billion a year over the next two years (2018: THB63 billion). Fitch expects its revenue and EBITDA to be relatively flat in 2019 and to grow in 2020. We expect the weaker chemicals industry outlook to be offset by growth in the cement and building materials (CBM) industry and increasing contribution from the packaging business expansion. Fitch believes demand for cement in Thailand will continue to recover, driven by construction growth in both private and public segments, especially developments relating to mass-transit extensions. The US-China trade war could dampen demand for several chemical products, in Fitch's view.
Well-Diversified Businesses: SCC's ratings are supported by both product and geographic diversity of its core CBM, chemicals and packaging businesses, helping to smooth its operating cash flow and mitigate some sector-specific risks. Strong cement demand in the domestic market compensated for the previous trough in petrochemicals in 2011-2012, and the shrinking cement earnings over 2015-2018 were offset by the chemicals upturn and the expanding packaging business. SCC's EBITDA is generally led by CBM and chemicals as they contribute 80%-85%. Fitch expects the EBITDA contribution from packaging to increase to about 25% by 2020 following the acquisition of Fajar.
SCC has diversified its footprint across ASEAN countries for all its key businesses and Fitch expects SCC's revenue generation from ASEAN operations to increase to 20%-25% over the medium term (2018: 15%). This rise will be mainly supported by a gradual improvement of the regional cement plants and expansion of packaging business, including additional capacity of packaging paper in the Philippines and consolidation of Fajar in Indonesia. We expect earnings improvement in the regional cement business to be slow because of oversupply (particularly in Indonesia and Vietnam) pressuring product prices and margins. SCC's revenue from exports accounted for 27% of total revenue in 2018.
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 polyvinyl chloride), and packaging paper in the domestic market and several ASEAN countries.
Product Cyclicality: The ratings also take into account SCC's inherent exposure to the cyclicality of the chemicals business. Furthermore, SCC lacks pricing influence because commodities form the bulk of its products and their prices are determined by global demand and supply.
DERIVATION SUMMARY
SCC has stronger business profile than its closest peer in Thailand's building materials sector, Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), in light of SCC's larger domestic cement market share. SCC's stronger business profile, given its significantly larger operating scale and diversification across various businesses, warrants the one-notch higher ratings, despite SCC's slightly higher leverage.
SCC has a smaller chemicals business compared with PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile of aa-(tha)), the largest integrated refining and petrochemical operator in Thailand. However, SCC has broader diversification across industries that reduces its exposure to volatility in the chemicals industry. Nevertheless, PTTGC has a more conservative financial profile, resulting in a higher rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to be flat in 2019 and increasing by about 5%-6% a year in 2020-2021, largely from the CBM and packaging businesses while revenue from the chemicals business expected to drop in 2019-2020
- EBITDA margin maintained at about 14%-15% in 2019-2021 (2018: 14%)
- Five-year capex plan of about THB250 billion
- Dividend payout ratio of 40%-50% in 2019-2021
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- We do not expect positive rating action unless there is a significant profit contribution from the overseas expansion of its chemicals business; for instance, from the full operation of the Long Son Petrochemicals project in Vietnam.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A weakening of the company's business and financial profile resulting in FFO adjusted net leverage at above 2.0x for a sustained period during the normal run of business, or above 3.0x during a business expansion phase.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: SCC's liquidity is supported by cash and liquid investments (Fitch defined) of about THB56 billion at end-March 2019, strong cash flow from operations of about THB60 billion a year, and strong refinancing ability through local debt-capital markets and bank funding. SCC's liquidity over the two years is likely to rely on external funding because of its large capex plan. However, SCC has secured bank loans for its major committed projects.
Total debt was THB203 billion at end-March 2019, almost 90% of which was Thai baht-denominated senior unsecured debentures. About 24% of total debt will mature in the next 12 months.
Additional information is available on www.fitchratings.com