Fitch Affirms SCCC's at 'A(tha)'/Stable; Debentures Rated 'A(tha)'
OREANDA-NEWS. Fitch Ratings (Thailand) Limited has affirmed Thailand-based Siam City Cement Public Company Limited's (SCCC) National Long-Term Rating at 'A(tha)', its National Short-Term Rating at 'F1(tha)', and the National Long-Term Rating on its senior unsecured debentures at 'A(tha)'. The Outlook is Stable.
At the same time, Fitch has assigned the company's new senior unsecured debentures of up to THB4.0bn due in 2024 and 2026 a National Long-Term Rating of 'A(tha)'. The proceeds of the new debentures will be used to refinance existing debt, fund business expansion or meet working capital requirements. The notes are rated at the same level as SCCC's National Long-Term Rating as they constitute direct, unsecured, unconditional and unsubordinated obligations of the company.
KEY RATING DRIVERS
Higher Leverage Reduces Rating Headroom: Fitch expects SCCC's leverage, measured by FFO-adjusted net leverage, to increase to 1.5x-2.0x in 2016-2017 from 0.9x in 2015. SCCC is embarking on significant investment to increase capacity and diversify its business. This will be largely funded by domestic and overseas debt, which could double net debt and reduce the headroom in the rating in the near term. Over the medium term, though, Fitch expects leverage to fall below 1.5x as operating cash flows continue to increase.
Strong Market Position: SCCC is Thailand's second-largest cement producer, with stable market share of 27% based on sales. Fitch expects the company to be able to defend its market position against the capacity expansion by the third-largest producer due to its strong brands in cement and ready-mixed concrete. Its relatively high profit margin should provide pricing flexibility to respond to heightened competition.
Competition to Impact Profitability: Fitch expects competition in the Thai cement market to intensify in 2016 due to new capacity coming on line. SCCC's EBITDA margin is likely to narrow as it defends its market share. Fitch expects EBITDA margin to reduce to 21%-22% in 2016 from 23%-24% in 2013-2015, a short-term weakening until growth in demand absorbs the new supply by 2017.
Vulnerable to Energy Prices: SCCC's EBITDA margin is highly sensitive to energy costs, mainly coal and electricity. Fuel and electricity costs generally account for more than 70% of total production costs. Average benchmark coal prices decreased by almost 20% in 2015 and Fitch expects it to further decline in 2016 as excess capacity continues to weigh on prices, with only a modest and gradual recovery in prices over the medium term.
Single-Market Concentration: SCCC's ratings are constrained by a lack of geographical diversification. Most of its earnings come from cement and related products sold in Thailand.
Fitch's key assumptions within our rating case for the issuer include:
- Improving domestic cement sales volumes but lower average selling prices in 2016;
- Inclusion of contributions from its recently proposed acquisition of cement companies in Thailand and Bangladesh;
- Exports to continue to form 20%-25% of total sales in 2016 and to decline in 2017 due to improving domestic sales;
- EBITDA margin to fall to about 21%-22% in 2016 and improve to about 22%-23% in 2017;
- Capex at THB4.0bn-THB8.0bn a year in 2016-2017; and
- Dividend payout ratio of about 70% - 80%.
Positive rating action is unlikely over the medium term, given the company's high leverage and debt-funded growth. However, future developments that may, individually or collectively, lead to positive rating action include:
- a significant increase in operating scale or revenue diversification, which would help to improve SCCC's business profile, while it maintains its FFO-adjusted net leverage below 1.25x
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- a large decrease in profit margins, a large debt-funded investment, or higher-than-expected dividend payouts, which lead to an increase in FFO-adjusted net leverage to over 2.25x on a sustained basis