TRIS Rating has assigned the company rating of QTC Energy PLC (QTC) at “BBB” with “stable” outlook. The rating reflects the company’s growth prospects derived from rising demand for electricity, QTC’s ability to provide specialized distribution transformers, and its proven track record as an original equipment manufacturer (OEM). The rating also takes into consideration the management’s strategy to pursue the automation production. These strengths are partially constrained by intense competition in the domestic market for distribution transformers, customer concentration risk, and volatile raw material prices. Demand in the mining industry, a key end-user segment for QTC’s export market, remains soft and thus is a rating concern. The “stable” outlook reflects the expectation that QTC will improve its profitability and operating cash flow, despite intense competition and the event risk which may affect the distribution transformer market. The significant increase in debt, if any, could negatively impact QTC’s financial profile and credit rating.
QTC was established in 1996 and listed on the Market for Alternative Investment (MAI) in July 2011. Mr. Poonphiphat Tantanasin, the chief executive officer, and his family are the major shareholders, with a combined stake of 63% as of September 2014. QTC is one of the medium-sized manufacturers of electrical transformers, making distribution transformers under its own brand “QTC”.
Located in Pluakdaeng, Rayong province, QTC has steadily incorporated more automation into its plant. Automation cuts production lead times, reduces the reliance on skilled labor, and lowers costs. These benefits increase QTC’s competitive position. QTC’s products have passed stringent tests, such as the short circuit withstand, conducted by two internationally recognized laboratories, CESI in Italy and KEMA in the Netherlands. Moreover, QTC is accredited by several independent international standards setting organizations, backed by various accomplished certifications such as ISO 9001, ISO 14001, OHSAS 18001, and ISO/IEC 17025. QTC mainly offers the distribution transformer. However, its product covers the capacity range of 1-30,000 kilovolt-amperes (KVA) at system voltage up to 72 kilovolts (kv).
In 2013, 95% of QTC’s total revenue came from the sale of distribution transformers, 1% from power transformers, and 2% from services. QTC’s customer base comprises state enterprises (34% of total revenue), private companies (43%), and export customers (20%). QTC has established a long relationship with an Australian agent which it supplies the OEM product. As a result, QTC could secure a certain amount of export sales annually and has gained expertise in two market segments: mining, and oil & gas. QTC is exposed to customer concentration risk, since around half of its revenue depends on three major customers: two electricity authorities in Thailand, the Metropolitan Electricity Authority (MEA) and the Provincial Electricity Authority (PEA), and its export agent in Australia.
In the distribution transformer segment, competition is intense. There are approximately 25 manufacturers in Thailand. However, half of them are small manufacturers and are not qualified to supply to the electricity authorities or large corporations. In the domestic market, the electricity authorities, the MEA and the PEA, are the main end-users of distribution transformers. These agencies have been given the responsibilities to develop the electricity transmission system for the nation. The customers in private sector are, for example, industrial factories, large buildings, and infrastructure projects which require specialized and reliable transformers.
QTC’s operations were hurt by the recent political crisis in Thailand. The round of anti-government protests, which started in late October 2013, delayed bids for many state enterprise projects and dampened investments made by the private sector. Moreover, QTC’s export orders were hurt from declining demand of the mining sector in Australia. As a result, QTC’s revenue dropped by 16% year on year (y-o-y) to Bt804 million in 2013. During the first nine months of 2014, revenue continued to decline, slipping by 23% y-o-y to Bt383 million. PEA has suspended the bidding for electricity transformer since the fourth quarter of 2013 through the year 2014. The value of the transformers QTC sold to state enterprises during the first nine months of 2014 plunged to Bt22 million, from Bt149 million during the same period of 2013. Nonetheless, QTC’s operating performance is expected to recover in the last quarter of the year as QTC has schedule to deliver approximately Bt360 million worth of transformers in the fourth quarter of 2014. As a result, total revenue in 2014 will drop only about 5% from the 2013 level.
QTC’s operating margin before depreciation and amortization dropped slightly to 16% in 2013, compared with 18.8% in 2012, and further declined to -2.6% for the first nine months of 2014. The significant drop of QTC’s profitability was due to the absence of contribution from state enterprises and the intensified competition in private sector. In general, the sales to state enterprises carry higher margin due to the sizeable volume. For the full year, the operating margin is expected to recover to around 10%. QTC will clear some of its backlog, which includes some orders from the MEA bid in October 2014.
QTC’s liquidity profile is strong, as evidenced by the funds from operations (FFO) to total debt ratio and the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio. During 2008-2013, QTC’s FFO to total debt ratio was satisfactory, reaching over 75%. The EBITDA interest coverage ratio stayed higher than 15% in the same period. However, the FFO to total debt ratio dropped significantly to 28.1% (annualized, from the trailing 12 months) at the end of September 2014, as a result of QTC’s weaker operating performance.
Most of QTC’s debts are short-term loans, which QTC needs to finance its working capital requirements. QTC’s debt to capitalization ratio was below 30% from 2008 through 2013. Owing to the high level of backlog and inventory, the debt to capitalization ratio increased to 32.4% at the end of September 2014. QTC’s financial leverage is expected to improve at the year-end once it delivers most of the backlog. In the medium term, QTC’s financial leverage is not expected to rise significantly from its existing operation. QTC has a plan to diversify into power business. The new investment, if sizeable, should be considered a ring-fence financing or partly financed by new equity injection to support the strong capital structure.
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