Fitch Affirms Siam City Cement at 'A(tha)'; Maintains Negative Outlook

Stocks and Financial Services Press Releases Monday March 23, 2020 08:29
Bangkok--23 Mar--Fitch Ratings
Fitch Ratings (Thailand) has affirmed Siam
City Cement Public Company Limited's (SCCC) National Long-Term Rating at
'A(tha)' and has maintained the Negative Outlook. The agency has simultaneously
affirmed SCCC's senior unsecured rating at 'A(tha)' and National Short-Term
Rating at 'F1(tha)'.
The Negative Outlook reflects the risk of
SCCC not deleveraging to a level consistent with its rating by 2021 due to the
challenging macro environment brought by the coronavirus pandemic. We expect
the virus to continue spreading across the Asia-Pacific region in the near
term, which will suppress countries' macro economies and business activity,
including construction, during 2020. We assume the consequences for SCCC to be
limited in 2020 and have factored in a recovery in 2021, although EBITDA may
contract during this high-leverage period and delay the company's deleveraging
by one year. The revision of the Outlook to Stable relies on SCCC's resiliency
to the downside macro scenario and its ability to maintain a sound financial
profile, with FFO adjusted net leverage at below 2.5x by end-2021.
KEY RATING DRIVERS
Deleveraging Risk: Fitch expects SCCC's
FFO adjusted net leverage to stay at 2.6x-3.2x in 2020-2021 (2019: 3.0x),
assuming its EBITDA will fall by around 10% in 2020 and fully recover in 2021.
SCCC has shown a strong commitment to deleverage via an equity injection in
2017, capex and dividend cuts and initiatives to improve operating cash flow,
following a series of acquisitions since 2016 that drove its leverage to peak
at 4.6x in 2017. Fitch does not expect major business expansion over the near
term and for SCCC to maintain its capital discipline over the next two years.
EBITDA Contraction in 2020: Fitch expects
SCCC's revenue to drop by mid-single digits and for its EBITDA margin to fall
to 17.5% in 2020 (2019: 18.5%) then fully recover in 2021. Increased private
and public sector construction activity is limited while the pandemic
continues, although ongoing projects are likely to continue unless lockdown
measures are implemented. SCCC's domestic revenue rose by around 5% in 2019 and
its trading and export business expanded by a strong by 60% from a small base.
This compensated for the decline in revenue and EBITDA in its regional
operations.
Geographical Diversification: SCCC is a
regional cement maker with footprints in Sri Lanka, Vietnam, Bangladesh as well
as Cambodia via a joint venture. Cement capacity outside Thailand accounted for
36% of the total, excluding the Cambodia joint venture, while revenue generated
from overseas (including exports) represented 47% of total revenue in 2019.
Geographical diversification reduces single-market concentration risk in
Thailand and smooths out the company's earnings. Overseas EBITDA compensated
for a decline in home markets in 2017, but the key growth driver switched to
Thailand in 2019 when regional performance deteriorated.
Strong Market Position: SCCC is Thailand's
second-largest cement producer, with a market share of 29% by sales in 2019,
according to the company. SCCC has defended its market position against
increasing supply and heightened competition in the domestic market over the
past several years with its strong brand and pricing flexibility. SCCC also has
a strong market position in its regional cement operations. It is Sri Lanka's
largest competitor and the sole owner of clinker production, with a market
share of 33% in 2019. It is also south Vietnam's second-largest competitor,
with 21% market share in 2019.
Vulnerable to Energy Prices: SCCC's EBITDA
margin is highly sensitive to coal and electricity costs, which account for
more than 60% of its total production costs. However, coal prices eased in 2019
from a high base in 2018; we expect coal prices to remain low in 2020, which
should be positive for the company.
DERIVATION SUMMARY
SCCC has a weaker business profile than
its closest cement industry peer, The Siam Cement Public Company Limited (SCC,
A+(tha)/Negative), in terms of operating scale, SCC's domestic market position
as the country's largest cement producer and diversification across geographies
and businesses. SCC's stronger business profile warrants the one-notch
difference in ratings. However, the Negative Outlook on both companies reflects
the risk to their leverage profile from weakened operating cash flow and heavy
investment.
CP ALL Public Company Limited
(A(tha)/Stable) is a rating peer in the Thai food-retailing industry that has a
significantly larger EBITDA and stronger business profile as the country's
leading convenience-store chain. It is therefore able to handle its higher
financial leverage, resulting in the same rating as SCCC.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating
Case for the Issuer

Revenue to fall by 4%-5% in 2020, comprising of -5% for the Thai operation (-20% over three-months and par for the remaining nine months) and 2%-5% for its regional operationsRevenue to fully recover with 7%-8% growth in 2021 and 4%-5% in 2022 following a recovery in all of SCCC's operating marketsEBITDA margin to fall to 17.5% in 2020 and recover to 18%-19% in 2021-2022Capex of around THB5.0 billion over 2020-2022Dividend payout ratio of around 80%-85%

RATING SENSITIVITIES
Developments that May, Individually or
Collectively, Lead to Positive Rating Action
The Outlook could be revised to Stable if SCCC's FFO adjusted net leverage falls to below 2.5x by 2021 on a projected basis.
Developments that May, Individually or
Collectively, Lead to Negative Rating Action
A significant weakening of operating cash flow, a large debt-funded investment or dividend payment to shareholders, leading to FFO adjusted net leverage remaining above 2.5x by 2021 on a projected basis.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: SCCC had THB6.2
billion of debt maturing within the next 12 months at end-2019, 44% of which
was short-term loans and revolving credit facilities for working capital. Its
liquidity is supported by cash on hand of THB4.8 billion at end-2019 and strong
refinancing ability through its credibility and record of strong access to
local debt-capital markets and bank funding. The company is in the process of
acquiring new committed revolving credit lines of THB3.0 billion, which we
expect to be completed in 1H20 and provide liquidity support for the next three
years.
Additional information is available on
www.fitchratings.com

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