TRIS Rating has assigned a rating of “BBB+” to the proposed issue of up to Bt6,000 million in senior unsecured debentures of TPI Polene PLC (TPIPL). At the same time, TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of TPIPL at “BBB+”. The outlook remains “stable”. The company plans to use the proceeds from the new debentures for investment projects and the company’s working capital. The ratings reflect the company’s strong competitive position in the domestic cement market, leading status in LDPE Homopolymer (LDPE) and LDPE Copolymer (EVA), product diversification, and moderate financial leverage. The ratings are, however, partially offset by the cyclical nature of engineering and construction (E&C) sector and petrochemical industry, exposure to fluctuations 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 stay at around 35%-40% over the next three years.
TPIPL was founded by the Leophairatana family in 1987. As of August 2014, 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). Total revenue in 2013 was Bt28.3 billion. Revenue from the cement segment accounted for 71% of the total revenue, while the plastic segment represented about 24% 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, concrete roof tile, fiber cement and light weight concrete. The integrated cement business offers economies 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 2013, 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 during the country’s financial crisis 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.
In overall, TPIPL’s financial results improved moderately during 2013 through the first nine months of 2014. The main drivers were an increase in prices of cement, and LDPE, as well as widened spread of LDPE. TPIPL’s revenue in the first nine months of 2014 was Bt22.9 billion, up by 8.1% y-o-y. The operating margin (operating income before depreciation and amortization as percent of sales) was 11.6% in the first nine months of 2014, compared to 11.1% in the same period last year.
Over the next three years, TRIS Rating’s base-case expects TPIPL’s revenue will soar in 2015 due to new sources of incomes generated from the fourth cement line, power plants, concrete roof tile, fiber cement, and light weight concrete. The revenue is expected to grow by 10%-20% per year during 2015 and 2016, reaching Bt38-Bt40 billion after all the projects are in full operation. The operating margin is likely to range between 10%-13%. TRIS Rating, however, concerns that the new supply from the fourth cement plant may lead to price competition in the domestic market and cause pressure on TPIPL’s profitability.
TPIPL plans to invest around Bt22-Bt23 billion during 2013-2015. More than 60% of the investment goes for the fourth cement plant. Therefore, the debt to capitalization ratio rose from 7.2% at the end of 2012 to 31.1% at the end of September 2014. After the completion of investment projects, the debt to capitalization is expected to stay at around 35%, which is still consistent with the assigned ratings.
TRIS Rating forecasts TPIPL’s funds from operations (FFO) will be around Bt3 billion per annum or more during the next three years. Cash flow protection measured by FFO to total debts are expected to weaken during 2014 and 2015 but the ratio will likely improve after TPIPL starts repaying its debts in 2016. The scheduled repayments will be about Bt5 billion between 2016 and 2017. The FFO to total debt ratio is expected to stay above 10%, and the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio will stay above 3 times.
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 2014, 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.