TRIS Rating has assigned the company rating of Toyo-Thai Corporation PLC (TTCL) at “BBB+”. At the same time, TRIS Rating has also assigned a rating of “BBB+” to TTCL’s proposed issue of up to Bt1,000 million in senior debentures with “stable” outlook. The company will use the proceeds from the debentures to repay loans and/or retain some of the proceeds to meet its working capital needs. The ratings reflect TTCL’s strong market position in the domestic EPC (engineering, procurement, and construction) sector, competitive engineering costs, and the moderate size of its project backlog. The strengths are partially offset by the cyclical nature of the EPC business, the operating risks of EPC projects, and heightened financial risk and execution risk from TTCL’s investments in a power generation project in Myanmar and other overseas projects. The “stable” outlook reflects the expectation that TTCL will continue to maintain its dominant market position in the domestic EPC sector. The operating margin is expected to stay between 7%-10%. TTCL’s planned investments in large-scale projects will put pressure on its financial profile during 2014-2016. However, the company is expected to keep the net debt to equity ratio below 1 time. Any significant investments which make its leverage ratio significantly higher than 1.5 times may cause a rating and/or outlook downgrade. In contrast, significant increase in its revenue base and improved profitability may upgrade its ratings and/or outlook.
TTCL was established in 1985 as a joint venture between Italian-Thai Development PLC (ITD) and Toyo Engineering Corporation (TEC), a Japanese firm. As of December 2013, TEC held approximately 22.3% of the total shares outstanding, Chiyoda Corporation, based in Japan, owned 6%, and ITD owned 3.3%. TTCL is an EPC contractor based in Thailand. The company can undertake EPC projects without support from an overseas parent company. TTCL primarily serves the petrochemical, chemical, oil and gas, and power generation industries.
TTCL’s business profile is strong. The company’s good reputation for project execution and quality performance is underscored by a list of well-respected customers, each with good credit quality. A proven track record, together with know-how and experience, should help the company retain its market position over the medium term. The company’s strong market position is also partly a result of its cost competitiveness. TTCL’s domestic engineering costs are lower than industry peers, which are mostly international EPC contractors.
The company’s backlog increased from Bt8 billion in 2010 to Bt16 billion in 2012. At the end of December 2013, TTCL’s backlog stood at Bt27 billion. The projects currently in the backlog will be recognized as revenue during 2014-2016. The total value of the projects currently in the backlog represent 70%-80% of TTCL’s revenues during 2014-2016, according to TRIS Rating’s base-case.
TTCL has broadened its business portfolio in two key directions. First, the company plans to make overseas projects which comprise a larger portion of total EPC revenue. Second, the company plans to invest in power generation projects so it can earn recurring income. As of December 2013, the company invested in 42% of the preferred shares of Nava Nakorn Electricity Co., Ltd. which operates a 110 megawatt (MW) combined cycle gas turbine power plant. The company is also investing in a 120 MW gas-fired power plant in Myanmar (the Ahlone project) and a 35 MW solar farm in Japan. The total cost for these last two projects is Bt6,000 - Bt6,500 million. Its shareholdings in each of these two projects are around 60%. The company is also responsible for constructing these two projects.
Its expansion into neighboring countries caused TTCL’s revenue base to increase to more than Bt15,000 million in 2013. TTCL’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) ranged from 4% to 8% during 2009-2013. TRIS Rating’s base-case expects TTCL’s revenues to be at least Bt13,000-Bt15,000 million per annum during 2014-2016. The operating margin is expected to improve gradually to a range of 7%-10% during 2014-2016. The operating income is expected to rise due to TTCL’s larger revenue base and the income from the Ahlone project. Funds from operations (FFO) is expected to total around Bt800 million per annum. TTCL’s investments in power plants will raise its net debt to equity ratio. However, an equity capital increase of Bt2,640 million in 2013 helps maintain its leverage ratio at a low level and makes more funds available for future investments.
Going forward, the company is expected to keep the net debt to equity ratio below 1 time. Cash flow protection, as measured by the FFO to total debt ratio and the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio, are expected to be weaker due to the higher level of leverage. However, these two ratios should remain consistent with the current rating. During 2014-2016, the FFO to total debt ratio is expected to stay around 20% on average, while the EBITDA interest coverage ratio will hold at 4 times or more.
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