TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of TPI Polene PLC (TPIPL) at “BBB+”. At the same time, TRIS Rating has assigned a rating of “BBB+” to TPIPL’s proposed issue of up to Bt17 billion in senior unsecured debentures. The outlook remains “stable”. TPIPL plans to use about Bt14 billion of the proceeds from the new debentures to refinance the company’s existing loans and the rest is used for working capital and investments.
The ratings continue to reflect TPIPL’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 the building materials and the petrochemical industries, 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 due to aggressive investment plans.
The “stable” outlook reflects the expectation that TPIPL’s strong market position in the cement segment will continue and operating performance of its plastic segment will gradually recover. The power business should help enhance overall profitability and cash flow base, and also offset volatility of the plastic segment. The operating performance of its cement business should benefit from lower energy cost and the government’s infrastructure projects. TRIS Rating expects TPIPL’s relationship with financial institutions should improve over time. Its debt to capitalization ratio should stay below 40% over the next two or three years.
The rating or outlook could be revised downward if the debt to capitalization ratio continues to increase and exceed 40% or the FFO to total debt is below 5% for an extended period. The events such as the further delay in the government’s projects or lower-than-expected performance of TPIPL’s power plants would negatively impact on TPIPL’s operating performance and the company’s rating.
Conversely, TPIPL’s ratings or outlook could be revised upward if TPIPL’s projects operate successfully and the company could strengthen its financial profile with solid cash flow generation and a substantial decrease in the debt. These could be evidenced by FFO to total debts ratio sustaining at around 15% and the debt to capitalization ratio maintaining below 30%.
TPIPL was founded by the Leophairatana family in 1987. As of March 2015, the family owned approximately 56% of the company’s shares. The company operates in two industries: cement (mainly cement and concrete products) and plastics (LDPE and EVA). Total revenue in 2014 was Bt30.1billion. Revenue from the cement segment accounted for 68% of the total revenue, while the plastic segment represented about 26% 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. Its fourth cement plant with the capacity of 4.5 million tones is expected to start operation in the fourth quarter of 2015 or early 2016. TPIPL’s cement production is vertically integrated, starting from clinker to cement, mortar, concrete, concrete roof tile, and fiber cement. The integrated cement business offers economies of scale and a competitive cost structure.
TRIS Rating views that the cement plant project poses a medium-term market risk for TPIPL. If the domestic demand for cement remains sluggish, TPIPL’s large capacity expansion to 13.5 million tonnes of cement may aggravate an industry oversupply situation and intensify price competition. However, this risk is partially tempered by TPIPL’s strong market position and accelerated approvals for the government’s infrastructure projects which should stimulate the cement consumption in Thailand.
TPIPL is one of Thailand’s leading LDPE and EVA producers, with a production capacity of 158,000 tonnes per annum. In 2014, TPIPL held about 20% market share by capacity for LDPE. TPIPL is the only EVA 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’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 ratings are 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.
TPIPL’s financial profile weakened after the mid of 2014 due to a contraction in domestic demand in the building material sector and inventory losses in the plastic segment. TPIPL’s total revenue fell by approximately 10% year-on-year (y-o-y) to Bt7.1 billion in the first quarter of 2015. The operating margin (operating income before depreciation and amortization as a percentage of sales), excluding exchange rate gains, also fell to 7.5%, compared with 8.8% in 2014. TPIPL’s debt to capitalization ratio in the first quarter of 2015 soared to 34.5% due to its ongoing investments. The rapid rise in the amount of debt weakened TPIPL’s liquidity as fund from operation (FFO) to total debt ratio (annualized with trailing 12 months) decreased to a low level of 5.2%.
TPIPL’s investment projects, including the fourth cement line, power plants, fiber cement, light weight concrete, and dry mortar would start operations in 2015 and beyond. The company’s capital expenditures are expected to be around Bt6-Bt7 billion during 2015-2016. The investment includes a new 70-MW power plant worth about Bt3.3 billion. The power plant is expected to start up in early 2017.
In TRIS Rating’s base-case scenario, TPIPL’s revenue would grow by 10%-20% per year over the next two or three years, reaching Bt40-Bt43 billion after the projects are in full operations. TPIPL’s profitability and FFO generation are expected to improve and become more stable once the new power projects are integrated with the existing businesses. The operating margin is expected to range between 13%-16%. TPIPL will continue to make large investments until 2016 and the debt to capitalization ratio is likely to touch 40%-42% by that year. TRIS Rating anticipates TPIPL will control its capital expenditure and not materially increase its debt to capitalization ratio beyond this level in order to be commensurate with the “BBB+” ratings. TRIS Rating expects that FFO would rise to Bt4-Bt5 billion per annum and the FFO to total debts would improve and stay above 15% during 2016-2017.
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