TRIS Rating has assigned the company rating of The Union Mosaic Industry PLC (UMI) at “BBB-” with “stable” outlook. The rating is based on UMI’s moderate market position as the third-largest producer of ceramic tile, its well-accepted brand name and reputation for producing quality products, and its higher market share after acquisitions of 89% shares of T.T. Ceramic Co. Ltd. (TTC) and 32% shares of The Royal Ceramic Industry PLC (RCI). However, these strengths are partially offset by rising financial leverage from a debt-funded acquisition, lower profit margin after incorporating the operating performance of TTC, cyclical nature of the industry, and exposure to volatile energy prices. The “stable” outlook reflects the expectation that UMI’s financial profile will improve over the next two to three years, as TTC’s operation improves. UMI’s rating or outlook could be revised upward if UMI’s operating margin significantly improves and is better than TRIS Rating’s base-case over the next six to 18 months. In contrast, the rating or outlook could be revised downward if the operating performance of TTC is lower than expected, dragging UMI’s performance below the current level.
UMI was established in 1973. The company was listed on the Stock Exchange of Thailand (SET) in 1989. As of September 2013, two main shareholders of the company were the “Penchart” family and the “Laowiwatwong” family, holding about 36% and 21% of the total shares, respectively.
UMI is the third-largest manufacturer and distributor of ceramic tiles in Thailand with a market share of around 15%. The company produces mosaics, ceramic wall and floor tiles, and decorative tiles. UMI’s tiles are sold under two well-known brands, Duragres and Duragres-Lila. The company’s products have been distributed in Thailand over 30 years. More than 90% of UMI’s products are sold through dealers and leading home improvement retailers.
In mid 2012, UMI bought 32% of the shares of RCI and acquired about 89% of the shares of TTC. RCI is a pioneer in the ceramic tile industry, mainly producing high quality wall tiles under the RCI brand name. TTC can produce large porcelain tiles. TTC’s products, sold under the Cergres brand name, are positioned in the high-end market segment. As a result, UMI’s combined production capacity was raised to 34 million square meters per year. UMI’s market share in Thailand rose from 10% to 15% in 2012, the third place behind the Siam Cement Group (SCG; 40%) and Dynasty Ceramic PLC (DCC; 30%). Currently, UMI’s Duragres product is the main contributor of revenue. This flagship product line accounts for almost 50% of total sales, followed by Duragres-Lila and TTC’s Cergres.
UMI’s revenue had been growing over the last five years. Prior to taking over TTC, UMI’s total revenue averaged Bt2,650 million, rising by 4% per annum on average. After acquiring TTC in July 2012, UMI’s revenue rose to Bt3,288 million in 2012, up by 22.8% year-on-year (y-o-y), and climbed to Bt3,736 million in 2013, a 13.6% rise from 2012. Approximately, the revenue contribution from TTC accounted for 20% of UMI’s total revenue in 2013. However, the revenue generated from TTC is expected to rise once the company can boost its sales of porcelain tiles in the domestic market. In 2013, the capacity utilization rate of TTC’s plant was only about 40%.
UMI’s financial risk profile has been increasing over the past two years. Its operating performance declined after incorporating the weaker performance of TTC. UMI’s operating profit (before depreciation and amortization, as a percentage of sales) dropped significantly from 11.3% in 2011 to 5.6% in 2013. TTC’s operating losses before depreciation and amortization was Bt103 million in 2013, or equivalent to operating loss margin of 14.3%. UMI’s leverage ratio increased after acquiring TTC and RCI. The debt to capitalization ratio increased from 31.3% in 2011 to around 53% in 2013. Outstanding debt grew from Bt617 million in 2011 to Bt2,077 million in 2013. A significant portion or Bt879 million of the outstanding debt was a restructured debt obtained from TTC. This portion of debt carries a very low interest rate and long repayment schedule. Another portion or Bt400 million came from a debt used to finance the acquisition of TTC.
The declining profitability coupled with the rising debt level caused UMI’s cash flow protection, measured by the fund from operation (FFO) to total debt ratio, to decline continuously from 42% in 2011 to 15% in 2012 and 8.5% in 2013. However, its earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio of 5 times in 2013 remained acceptable due to the relatively low interest payment of TTC’s restructured debt.
Going forward, TRIS Rating has concerns about TTC’s operating performance and the current level of uncertainty surrounding the Thai economy. If demand remains sluggish, TTC will require more effort to increase sales and raise the utilization rate. TTC’s weak performance is expected to pressure UMI’s overall financial profit over the next one or two years. The imposition of new regulations regarding quality control in January 2014 is expected to help reduce imports of low-quality products, leading to lessen the competition in the market. However, overseas tile manufacturers will eventually meet the Thai quality standards and resume exporting their products to Thailand. Therefore, the benefits from this regulation remain to be seen.
Over the next three years, TRIS Rating’s base-case is expected that UMI’s revenue is likely to increase to around Bt4,000 million per year. The growth driver is from TTC’s factory utilization rate rises. The operating profit margin should be improved to be between 6% and 10%, following the rising level of TTC’s production rate. The debt to capitalization ratio should be improved from 52% at the end of 2013 to around 40%-45% over next three years. The company is likely to have no any large investment over Bt500 million in the foreseeable future.
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