TRIS Rating has assigned a rating of “BBB+” to the proposed issue of up to Bt5,000 million in senior debentures of TPI Polene PLC (TPIPL). At the same time, TRIS Rating has affirmed the company and existing senior debenture ratings of TPI Polene PLC (TPIPL) at “BBB+”. The assigned issue rating replaced the rating of the proposed issue of up to Bt3,000 million announced on 21 November 2013 as the company decided to increase the bond size. The outlook remains “stable”. The increase in the bond size has no effect on the ratings as the company plans to use the proceeds from the new debentures for investment projects that have already been taken into consideration in the ratings. 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 business strength in the cement business will continue for the next three years 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 below 30% 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 nine 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 the first nine months of 2013 improved from the same period a year ago and were in line with TRIS Rating’s base-case expectation. Revenue during the first nine months of 2013 stood at Bt21.2 billion, up 1% from the same period a year ago. Meanwhile, operating margin (operating income before depreciation and amortization as a percentage of sales) during the first nine months of 2013 was 11.1%, compared with 9.1% during the same period last year. The company generated funds from operations (FFO) during the first nine months of 2013 at Bt2.6 billion, already above minimum base-case FFO of Bt2.5 billion per annum.
For the next three years, 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 2013-2014 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 are expected 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 September 2013, TPIPL’s debt to capitalization ratio was at 12.8%, 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 during 2013-2015 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 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 4 times.
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