TRIS Rating has affirmed the company rating of QTC Energy PLC (QTC) at “BBB” with “stable” outlook. The rating reflects the company’s growth prospects derived from electricity demand and promoting solar power projects, 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 team’s strategy to automate production. These strengths are partially constrained by intense competition in the domestic market, customer concentration risk, and volatile raw material prices. Export market has been soft due to the sluggish mining industry in Australia, a key market.
The “stable” outlook reflects the expectation that QTC’s profitability and operating cash flow will stay healthy. QTC’s rating and/or outlook could be revised upward if its expansion efforts, in new markets or new lines of business, are successful and generate material earnings and cash flows. In contrast, the rating and/or outlook could be downgraded if aggressive investments or intense competition lead to significant increases in debt and a weaker liquidity profile.
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 62% as of September 2015. QTC is a medium-sized manufacturer of electrical transformers, providing products under its own brand “QTC”. Although QTC focuses on distribution transformers, its production capacity range from 1-30,000 kilovolt-amperes (KVA) at system voltages up to 72 kilovolts (kv).
Located in Pluakdaeng, Rayong province, QTC has steadily incorporated more automation into its plant. Automation cuts production lead times and reduces the reliance on skilled labor, hence, increases plant efficiency. These benefits enhance QTC’s competitiveness and cost 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 certifications such as ISO 9001, ISO 14001, ISO50001, OHSAS 18001, and ISO/IEC 17025.
During 2010-2014, 94% of QTC’s total revenue came from the sale of distribution transformers, 2% from power transformers, and the remainder from services and the sales of transformer components. QTC’s customer base comprises state enterprises (37% of total revenue), private companies (39%), and export customers (21%). QTC has long-established relationship with an Australian agent, to supply OEM transformers, specialized in two market segments: mining, and petroleum. However, the declining of Australian mining industry diminished the growth of QTC's export sales.
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. Major users are the Metropolitan Electricity Authority (MEA), the Provincial Electricity Authority (PEA), and private companies in various industries, i.e., industrial factories, large buildings, and infrastructure projects which require specialized and reliable transformers. The MEA and the PEA are the governmental agencies, which have annual budget to develop the electricity transmission system for the nation. QTC is exposed to customer concentration risk. During the first nine months of 2015, revenue from the electricity agencies (the MEA and the PEA) contributed around 24% of QTC’s total revenue, while revenue from a company engaging in solar power projects accounted for 29% of QTC’s total revenue.
QTC’s operations in 2013-2014 were hurt by the political crisis in Thailand. The series of protests delayed bidding for many state enterprise projects and private sector clients postponed their investment plans. Dampened by declining export orders, QTC’s revenue contracted by 16% in 2013 and 5% in 2014 after posting growth of over 30% per year in 2011-2012. QTC’s operating margin before depreciation and amortization was 13.6% in 2014, down from 16% in 2013 and 18.8% in 2012. The significant drop in profitability in 2014 was due to lost sales at state enterprises and the intensified competition in the private sector. The sales to state enterprises generally carry higher margins due to the sizeable order volumes.
QTC’s operating performance rebounded strongly in 2015, following the resumed order of the PEA and robust demand from solar power projects. The PEA re-opened bidding for electrical transformers in early 2015. As a result, QTC’s revenue surged by 75% year-on-year (y-o-y) to Bt670 million during the first nine months of 2015. The operating margin before depreciation and amortization improved to 12% in the first nine months of 2015, compared with -2.6% during the same period of 2014. QTC’s operating performance is expected to improve in the last quarter of 2015 and carry through 2016, on the back of a high order backlog, a strong demand from solar power projects. As of September 2015, QTC had a backlog of Bt460 million, 90% of which was scheduled to be delivered in 2015. As a result, total revenue in 2015 will hover around Bt1,100 million, up from Bt761 million in 2014.
QTC’s total debt surged from Bt118 million in 2014 to Bt321 million at the end of September 2015, as a result of high backlog and inventory awaiting delivery. About 90% of QTC’s debts are short-term loans to finance its working capital requirements. The total debt to capitalization increased from 19.5% at the end of 2014 to 39.4% as of September 2015. The ratio will improve to lower and hover at around 20% as normal level after the debt financing working capital is paid. QTC’s liquidity remained strong. The funds from operations (FFO) to total debt ratio was 84.1% in 2014 and 54.9% (annualized, from the trailing 12 months) at the end of September 2015. The ratio is expected to improve to higher level once the backlog is delivered. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was 14 times during the first nine months of 2015.
During 2016-2018, TRIS Rating projects QTC’s revenue to be around Bt1,000 million per annum and EBITDA will range between Bt150-Bt200 million per year, while QTC’s annual debt repayment will be below Bt20 million. QTC’s financial leverage is not expected to rise significantly. The company has a plan to diversify into an alternative energy business. The new investment, if sizeable, should be considered as ring-fence financing or will be financed in part with new equity in order to keep QTC’s balance sheet strong and avoid an over-leveraged capital structure.
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