TRIS Rating has assigned a rating of “BBB+” to the proposed issue of up to Bt3,000 million in senior debentures of TPI Polene PLC (TPIPL). At the same time, TRIS Rating has affirmed the company rating of TPIPL at “BBB+” with “stable” outlook. The company plans to use the proceeds from the new debentures for business expansion and working capital. The ratings reflect 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.
TPIPL was founded by the Leophairatana family in 1987. As of March 2013, the family owned approximately 56% of the company’s total shares. The company operates in two industries: cement (mainly cement and concrete products) and plastic. The company’s total revenue in 2012 was Bt27.8 billion. Revenue from the cement segment accounted for 68% of the total revenue, while the plastic segment represented about 26% of the total.
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 2012, TPIPL held 20% in 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 financial profile in 2012 weakened from a year ago, but remained in line with TRIS Rating’s projection. The company’s operating margin (operating income before depreciation and amortization as a percentage of sales) dropped sharply due to price and cost fluctuations in the plastic segment. At the end of 2012, TPIPL’s debt to capitalization ratio was at 6.5%, 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, particularly the fourth cement plant worth approximately Bt11 billion. The expansion of the fourth cement plant allowed the company to settle all the litigations with two overseas creditors in March 2013, ending the risk of contingent liabilities since 2001 totaling Bt1.9 billion, including interest charged at 7.5% per annum. Nonetheless, TRIS Rating notes that the cement plant project poses 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.
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 (FFO) 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.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2013, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.