TRIS Rating has affirmed the company and senior unsecured debenture ratings of Toyo-Thai Corporation PLC (TTCL) at “BBB+” with “stable” outlook. 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. However, the strengths are partially offset by the cyclical nature of the EPC business, the operating risks of EPC projects especially overseas projects, and the heightened financial and execution risks from TTCL’s investments in a power project in Myanmar. The “stable” outlook reflects the expectation that TTCL will maintain its dominant market position in the domestic EPC sector. The operating margin is expected to stay between 6%-8%. There is some credit upside, if TTCL’s operating performance is better than expected. However, the upside may be out weighted by TTCL’s planned investments in large-scale projects, which is likely to put pressure on its financial profile. There is also some credit downside. TTCL’s investments in large-scale projects will likely raise the total debt to capitalization ratio above the current rating thresholds. Should TTCL make any large-scale investments, the ratings will take into consideration the execution risk, the quality of the projects, and the funding structure.
TTCL is an EPC contractor based in Thailand. TTCL was established in 1985 as a joint venture between Italian-Thai Development PLC (ITD) and Toyo Engineering Corporation (TEC), a Japanese EPC firm. As of August 2014, TEC held approximately 22.3% of the total shares outstanding, while Chiyoda Corporation, based in Japan, owned 6%, and ITD owned 3.3%. 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 its industry peers, which are mostly international EPC contractors.
As of September 2014, TTCL’s backlog stood at Bt27 billion. The total value of the current projects in the backlog will be realized 70% of TTCL’s revenues during 2015, 40% in 2016, and 25% in 2017, according to TRIS Rating’s base-case.
TTCL has invested in power projects so it can earn recurring income. As of September 2014, the company invested Bt673 million when it purchased 42% of the preferred shares of Nava Nakorn Electricity Co., Ltd. (NNE). NNE operates a 110 megawatt (MW) combined cycle gas turbine power plant. The company also invested and built a 120 MW gas-fired power plant in Myanmar. The plant called the Ahlone project, carries a total cost of Bt5,500 million. TTCL owns around 60% of the Ahlone project. As it expanded into neighbouring countries, TTCL’s revenue base increased to more than Bt15,000 million in 2013. TTCL plans to invest and build a 1,280 MW coal-fired power plant in Myanmar. This project will cost Bt80,000- Bt85,000 million.
TTCL’s financial profile for the first nine months of 2014 was in line with TRIS Rating’s base-case scenario. However, TTCL’s profits were lower than expected. The operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first nine months of 2014 was 3.7%, decreasing from 5.3% in 2013. TRIS Rating’s base-case, excluding the 1,280 MW coal-fired power plant project, expects that TTCL’s revenues will be at least Bt15,000-Bt18,000 million per annum during 2015-2017. The operating margin is expected to improve gradually to 6%-8% during 2015-2017. Operating income is expected to rise because the company will receive income from the Ahlone project. Funds from operations (FFO) is expected at Bt600-Bt700 million per annum.
During 2015-2017, TRIS Rating’s base-case expects TTCL’s net debt to equity ratio will stay below 1 times. Cash flow protections, 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 improve. TTCL will receive more income from its investment in the Ahlone project, pushing the cash flow protection measures higher. The planned investment in the 1,280 MW coal-fired power plant could materially change TTCL’s capital structure. During 2015-2017, the FFO to total debt ratio is expected to average around 20%, while the EBITDA interest coverage ratio will hold at 4 times or more.
Company Rating: BBB+ Issue Rating: TTCL175A: Bt1,000 million senior unsecured debentures due 2017 BBB+ Rating Outlook: Stable 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 2015, 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.