TRIS Rating has affirmed the company and senior debenture ratings of TPI Polene PLC (TPIPL) at “BBB+” with “stable” outlook. The ratings reflect the company’s strong competitive position in domestic cement market, leading status in LDPE Homopolymer (LDPE) and LDPE Copolymer (EVA), product diversification, and currently low financial leverage. The ratings are; however, partially offset by the cyclical nature of engineering and construction (E&C) sector and petrochemical industry, exposure to fluctuation in 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 market strength in the cement business will continue and that its plastic segment will recover within the next two years. The outlook also reflects TPIPL’s debt to capitalization ratio to remain below 30%, or the debt to equity ratio below 0.4 times, over the next three years.
TPIPL was founded by the Leophairatana family in 1987. As of August 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 (LDPE and EVA products). 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’s business profile is moderate. The company is the third largest cement producer in Thailand with a production capacity of 9 million tonnes per annum. The company’s cement market share by capacity has been staying at about 18% for the past several years. TPIPL’s cement production is vertically integrated, starting from clinker to cement, mortar, concrete, and fiber cement. The integrated cement business supports an economy of scale and a competitive cost structure. However, cement production cost is highly exposed 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 about 20% in market share by capacity for LDPE. For EVA, TPIPL is the only producer in Thailand. The company mainly focuses on EVA products for export markets. TPIPL’s business risk in the plastic segment reflects the exposure to a single ethylene supplier, price volatility in petrochemical products, challenges from substitution products, technological changes, and global competitors. TPIPL is not limited to purchase ethylene only from the current supplier, but the concern on single supplier reflects TPIPL’s lack of record in diverse ethylene sourcing. TPIPL’s ratings reflect benefits from business diversification, in which an exposure to domestic economy from cement operation is partially counterbalanced by revenue from EVA exports.
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 results during 2012 to the first half of 2013 had weakened from 2011, largely due to sharp declines in plastic prices and spreads after PTT Global Chemical PLC entered the LDPE market in 2011 with production capacity of 300,000 tonnes per annum. However, TPIPL’s financial profile remains in line with the assigned ratings. TRIS Rating’s base-case expects TPIPL’s revenue to grow by 1%-4% during 2013-2014, and by 12%-15% during 2015-2016. The growth rate during the next two years reflects potential price pressures in the plastic segment. The jump in revenue in 2015 takes into consideration new sources of income from the fourth cement plant, fiber cements, and a power plant.
The company’s operating margins (operating income before depreciation and amortization as a percentage of sales) during the first half of 2013 and in 2012 were 8.7% and 8.1%, respectively, compared with 19.9% in 2011. For the next three years, TRIS Rating’s base-case expects operating margins of TPIPL to stay above 9% on average. TRIS Rating also expects an improvement in cement prices over the next 12 months and a recovery in plastic prices over the next two years.
At the end of June 2013, TPIPL’s debt to capitalization ratio was at 11.9%, an exceptionally low level for the company’s credit ratings. TPIPL’s ratings; however, factor in an expected rise in the company’s total debts from major investment projects, particularly the fourth cement plant. Total capital expenditures over the next three years are expected at Bt26 billion. The debt to capitalization ratio is expected to peak in 2015 at around 30%. TRIS Rating notes that the cement plant project poses a medium-term market risk for TPIPL. TRIS Rating expects TPIPL to generate funds from operations (FFO) at least Bt2.5 billion per annum during the next three years. Long-term debts maturing during 2013-2015 are below Bt2 billion per annum. Cash flow protection measures are expected to weaken over the next three years as leverage increases. TRIS Rating’s base-case expects the FFO to total debt to stay above 10%, and EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage to stay above four times.
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