TRIS Rating Co., Ltd. has assigned the company rating of TPI Polene PLC (TPIPL) at “BBB+” with “stable” outlook. The rating reflects a strong position of TPIPL in domestic cement market as the third largest cement producer, its leading status in LDPE Homopolymer (LDPE) and LDPE Copolymer (EVA), product diversification, expected benefits from cost saving initiatives, and currently low financial leverage. The rating is; however, partially offset by the cyclical nature of engineering and construction (E&C) sector and petrochemical industry, cost pressure from volatile coal prices, the company’s short record in accessing financial markets after debt rehabilitation, and an expected rise in its financial leverage. The “stable” outlook reflects the expectation that TPIPL’s business strength in the cement business will continue in the medium term and that it will deliver a respectable performance on the EVA segment. In any case, TPIPL is expected to maintain its debt to capitalization ratio not to exceed 30% in the medium term.
TRIS Rating reported that TPIPL operates in two industries: cement and plastic. The company’s total revenue in 2011 was Bt25.7 billion. Revenue from the cement segment accounted for 58% of the total revenue, while the plastic segment represented about 30% of the total. The company was founded by the Leophairatana family in 1987. At the end of March 2012, the family owned 57% of the company’s total outstanding shares.
TRIS Rating said, TPIPL is the third largest cement producer in Thailand with a production capacity of nine million tonnes per annum. The company’s domestic cement market share has been staying at around 18% for the past several years. TPIPL’s cement production is vertically integrated, starting from clinker, to cement, mortar, and concrete. The company’s cement business model supports an economy of scale and a competitive cost structure. However, the cement segment is negatively impacted by high exposure to fluctuations in coal prices.
TPIPL is one of Thailand’s leading LDPE and EVA producers with a production capacity of 158,000 tonnes per annum. In 2011, TPIPL held a 25% domestic market share for LDPE. For EVA, TPIPL is the only producer in Thailand. TPIPL’s business risk in the plastic segment reflects its heavy exposure to a single ethylene supplier, price volatility inherent in petrochemical products, and challenges from substitution products, technological changes, and global competitors.
TPIPL’s rating reflects benefits from business diversification, in which an exposure to domestic economy from cement operation is partially counterbalanced by revenue from EVA exports. In addition, while rising global commodity prices could exert an upward pressure on the company’s cement production costs due to higher coal prices, the rise will in turn likely to benefit the company’s plastic segment, and vice versa.
TPIPL’s rating is partially constrained by the company’s short record in accessing funding from financial markets after it exited the debt restructuring process. Its loan defaults and records of debt restructuring in the past require the assessment of the company’s credit risks on a conservative approach. However, TRIS Rating views that the company’s relationships with both local and foreign banks have been improving over time.
TPIPL’s rating takes into account positive effects expected in the medium term from the company’s cost centric initiatives. In the medium term, TRIS Rating expects the company’s operating margins before depreciation and amortization to improve to 14%-15%, up from 10%-13% at present.
At the end of June 2012, TPIPL’s debt to capitalization ratio was at 8.5%, an exceptionally low level for the company’s credit rating. TPIPL’s rating; however, factors in an expected rise in the company’s total debts from major investment projects during the next three years. Total capital expenditures are expected to peak in 2013 at around Bt9-Bt10 billion, while staying in a range of Bt6-Bt7 billion in 2012 and 2014. TRIS Rating notes that the project to build the fourth cement plant is very sizable and posing a medium-term market risk for TPIPL. It is uncertain at this point how the competition and price dynamics will evolve after four million tonnes of clinker and cement are added to the market in 2015.
TPIPL’s financial profile reflects a strong and relatively stable cash flow generations. In TRIS Rating’s view, TPIPL’s strong level of funds from operations (FFOs) provide a liquidity cushion commensurate with its rating category, taking into account that the company’s cash flow protection measures will become weaker in the coming years once its leverage increases, said TRIS Rating. — End
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