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.
KEY RATING DRIVERS
Rising Capex; High Leverage: Fitch expects SCC's funds from operations (FFO) adjusted net leverage to increase to about 3.0x in 2019-2021 (end-1H19: 2.7x) due to increasing capex. 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. This includes the acquisition of a 55% stake in listed Indonesia-based packaging company PT Fajar Surya Wisesa Tbk (Fajar) for THB21 billion, which was completed on 28 June 2019.
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 the company's revenue and EBITDA to be flat in 2019 before rising 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 expansion in its packaging business. Fitch believes demand for cement in Thailand will continue to recover, driven by increased construction in both the private and public segments, especially developments relating to mass-transit extensions. However, prolonged global trade tensions could dampen demand for several chemical products.
Well-Diversified Businesses: Fitch expects the EBITDA contribution from packaging to rise to about 25% by 2020 following the acquisition of Fajar. SCC's ratings are supported by both product and geographical diversity of its core CBM, chemicals and packaging businesses. This helps to smooth its operating cash flow and mitigate some sector-specific risks. SCC's EBITDA is led generally by CBM and chemicals as they contribute 80%-85%. Strong domestic cement demand compensated for the previous trough in petrochemicals demand in 2011-2012, and the shrinking cement earnings over 2015-2018 were offset by the upturn in chemicals and the expanding packaging business.
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 supported by a gradual ramp-up of the regional cement plants and expansion of the 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 businesses to be slow because of oversupply (particularly in Indonesia and Vietnam) pressuring product prices and margins. SCC's export revenue 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 has limited ability to influence pricing of many of its products in light of their commoditised nature whereby prices are determined by global demand and supply.
DERIVATION SUMMARY
SCC has a 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, taking into account the company's significantly larger operating scale and diversification across various businesses, warrants the one-notch higher ratings. This is 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, which 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 we expect revenue from the chemicals business 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 (2018: 50%)
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
Manageable Liquidity: SCC's liquidity is supported by cash and Fitch-defined liquid investments of about THB39 billion at end-June 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. However, SCC has secured bank loans for its major committed projects.
Total debt was THB217 billion at end-June 2019, 84% of which was Thai baht-denominated senior unsecured debentures. About 30% of total debt will mature in the next 12 months.