Fitch Affirms San Miguel Industrias' Ratings at 'BB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed San Miguel Industrias PET S.A.'s (SMI) Issuer Default Rating (IDR) and senior unsecured notes at 'BB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Leading Position in Peru:
SMI is the leading manufacturer and distributor of polyethylene terephthalate (PET) preforms and bottles in Peru, with a market share of about 70% and in the process of developing both recycled resin and thermoforming business units in line with the company's product diversification strategies. The group's performance benefits from the growing middle class and soft drink consumption in Peru. Production costs and scale advantages are high barriers to entry for competitors as well as long-term contracts, which include in-house facilities at customer's locations. The company generated about 66% of its 2015 EBITDA from Peru with increasing participation in Ecuador, Colombia and Central America.
During the last two years, the company has been diversifying its operations by expanding its operations in Colombia and Ecuador. Colombia and Ecuador will increase its share of volume and EBITDA during 2016 by capturing new clients and landing additional long-term contracts. Fitch positively views the increased geographical diversification. Cash flow volatility could increase due to the inherent risks of operating in Ecuador, which is rated 'B'.
Lower Capex Going Forward:
The company has budgeted capex of USD14 million, of which USD10 million will be spent in Peru, in 2016. Fitch expects a similar level of investments in 2017. Capex was USD38.6 million in 2015 instead of USD22 million as previously expected due to the purchase of assets of an Ecuadorian competitor and investments related to the new thermoforming business unit. Investments in Ecuador allowed SMI to sign four long-term supply contracts both Ecuador and Peru. These contracts will increase volumes by around 18% in 2016. In 2015, SMI's Colombian plant was fully operational, and the plant in Ecuador had its injection investments concluded while blowing was operational at 95%. For 2016, Colombia and Ecuador's installed capacities are already 80% secured by long-term contracts.
Client Concentration Risk and Long-Term Supply Agreement:
Main constraining factors for the ratings are SMI's limited size, product concentration and high level of exposure to a few bottlers, as its two main clients represented more than 50% of total revenues in 2015. SMI is subjected to the non-renewal of these contracts. About 85% of SMI's sales are based on long-term contract agreements which have been renewed many times. A contract with one of the main bottlers is partially maturing within the next two years and SMI is in the process of renewing it. Fitch factors into its current ratings that the renegotiation of the contracts with this bottler would have a marginal effect on SMI's performance. If a large contract is not renewed before its expiration date, a negative rating action could follow.
SMI's deleverage process has been delayed due to higher capex. Fitch expects a reduction of net leverage to about 3.0x in fiscal year-end 2016 (FYE16; 4x in 2015) due to increased EBITDA, as Colombia and Ecuador expansion plants are now fully operational, and lower capex. Fitch understands that the group's medium-term financial policy is to operate under a leverage ratio below the incurrence-debt covenant which is at 3.5x.
Positive Free Cash Flow:
Fitch expects SMI to generate a positive free cash flow (FCF) generation in 2016, as a result of operating cash flows increase as well as capex reduction. FCF -which includes interest payments- for the last three years has been negative due to high capex mainly allocated to expand capacity in Colombia and Ecuador. In 2015, cash flow from operations increased to USD33 million from USD13 million in 2014 due to higher EBITDA and improvements in working capital management. During 2015, the company was able to reduce inventories and account receivables. SMI did not pay dividends in the last two years. Fitch does not expect any dividend payments in 2016.
Improving Operational Results:
SMI's EBITDA is expected to continue growing from USD49.5 million in 2015 and USD41.8 million in 2014. Fitch expects EBITDA to grow in 2016 due to increased volumes coming from long-term contracts already signed with main clients. The recycling business will have a marginal profit contribution during 2016. EBITDA margin improved to 25.6% in 2015 from 21% due to higher EBITDA despite lower revenues (-2.7%) as resin prices --which are pass-through-- fell by 15.9% offsetting volume growth of 15%. Fitch expects SMI to maintain its EBITDA margin above 20% because of its operating model based on highly contracted revenues, its pass-through model that gives margin protection against price volatility of the resin (80% of total costs) and the natural hedges against currency fluctuation (equipment and client contracts are in USD).
Fitch's key assumptions within the rating case for the issuer include:
--Volume growth around 20% in 2016 and 10% in 2017 mainly coming from long-term contracts in Ecuador and Colombia;
--EBITDA margin above 20% over the next two years;
--Capex of USD14 million in 2016 and 5% of revenues for 2017;
--No dividends payments for 2016 and 2017.
A positive rating action could result from some combination of the following factors: a sustained strengthening of the company's net leverage to below 2.5x on a sustained basis, and strong FCF, improved geographical and client diversification while sustaining an EBITDA margin above 20%.
A negative rating action could be triggered by some combination of one or more of the following: net debt leverage above 4.0x or the non-renewal of a large supply contract.
LIQUIDITY AND DEBT STRUCTURE
SMI will not face material debt maturities in the short term. Its debt is mainly comprised of its USD200 million senior unsecured notes due in 2020. The company bought back USD16 million of its own bonds in 2014. SMI is a private company fully owned by Nexus Group SA. Positive support from the shareholder is factored into its Issuer Default Rating (IDR).
FULL LIST OF RATING ACTIONS
Fitch has affirmed San Miguel Industrias PET SA's ratings as follows:
--IDR at 'BB';
--Senior unsecured debt at 'BB'.
The Rating Outlook is Stable.