TRIS Rating has affirmed the company and senior unsecured debenture ratings of TTCL PLC (TTCL) at “BBB+” with “stable” outlook. The ratings reflect TTCL’s strong market position in the domestic EPC (engineering, procurement, and construction) sector, its capability of undertaking larger projects in Thailand and abroad, as well as its strategic diversification to the power business. However, these strengths are partially offset by the heightened leverage, the operating risks of EPC projects abroad, the cyclicality of the EPC business, and severe competition.
The “stable” outlook reflects the expectation that TTCL will maintain its strong market position in the domestic EPC sector. The operating margin is expected to stay between 5%-6% and the total debt to capitalization ratio will stay below 55%, or debt to equity lower than 1.2 times during 2015-2018.
The uplifted ratings are unlikely to occur in the near term but could emerge if TTCL’s operating performance is better than expected and its leverage falls significantly. However, the upside may be outweighed by TTCL’s planned investments in large projects, which is likely to put pressure on its financial profile. There is also some credit downside if TTCL’s profitability deteriorates further or the total debt to capitalization ratio rises above 60% for a sustained period. 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. TTCL went public in 2008 and was listed on the Stock Exchange of Thailand (SET) a year after. As of 18 December 2015, TEC held approximately 17.4% of the company’s shares outstanding, while Chiyoda Corporation, based in Japan, owned 3%, and ITD owned 3.3%. Positioned as an integrated EPC contractor, TTCL primarily constructs industrial plants including petrochemical and refinery, chemical, fertilizer, oil and gas, and power plants. In 2010, TTCL expanded into the power business, a move aimed at investing in propitious power projects, which helps reduce its susceptibility to cyclicality and the stiff competition in the EPC business.
The ratings reflect TTCL’s strong position in the domestic EPC market, particularly in the industrial plant segment. The company is among the top-tier SET-listed contractors, considering revenue base and asset size. The company’s good reputation for project execution and quality performance is underscored by a list of well-respected and creditworthy customers, including large refining and petrochemical companies. A proven track record, together with know-how and experience, should help the company retain its market position over the medium term.
The ratings also recognize TTCL’s ability to undertake large EPC projects and expand geographically. Notwithstanding the concentration risk stemming from large projects, TTCL has increased its sizable backlog during the past several years. A large backlog secures future revenues. As of September 2015, TTCL’s backlog soared to Bt34.7 billion. The total value of the current projects in the backlog will be realized 20% of TTCL’s revenues during 2015, 75% in 2016, and 45% in 2017, according to TRIS Rating’s base-case forecast. TTCL, along with its subsidiaries and branches abroad, has undertaken EPC projects in neighbouring countries, as well as Qatar, the Philippines, and the United States (US). Geographical diversification supports the ratings. TTCL achieved record revenue of nearly Bt20 billion in 2014, half of which were recognized from projects abroad.
The ratings also take into account TTCL’s business strategy to expand its scope of business to power producer. TTCL has invested in power projects so it will have steady sources of income from multi-year power purchase agreements. Moreover, TTCL engaged in EPC work for all the power projects and received EPC income as well. The company has invested in natural gas-fired, biogas, and solar power plants. TTCL commenced its power business in 2010 when it invested in 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 Ahlone, Myanmar; the “Ahlone Project”. TTCL, through its Myanmar-based subsidiary, owns around 72% of the Ahlone project, which carries a total investment cost of Bt5,500 million. TTCL is making good progress with its diversification strategy. The power segment has generated a sizable amount of EBITDA (earnings before interest, taxes, depreciation, and amortization) as the Ahlone power plant is starting to pay off. For the first nine months of 2015, the power segment accounted for around 60% of TTCL’s EBITDA, or Bt311 million. Looking ahead, the power business should earn fruitful returns and help sustain TTCL’s profitability.
Conversely, the ratings are constrained by TTCL’s weakened capital structure. A debt-funded expansion weakened TTCL’s capital structure. TTCL borrowed more to fund its working capital needs and the extensive investments for the power projects, particularly in the project in Myanmar. The company plans to invest and build a 1,280-MW coal-fired power plant in Myanmar. This project will cost Bt100,000- Bt103,000 million, which will push up TTCL’s leverage.
The ratings are also partly offset by the operating risks associated with projects abroad, despite the benefits TTCL receives from geographical diversification. In addition, the ratings are tempered by cyclicality of the EPC segment, which stands to suppress revenue and profits. Moreover, severe competition among contractors will slash TTCL’s profit margins.
TTCL’s financial profile for the first nine months of 2015 was lower than TRIS Rating’s base-case scenario. The leverage level was higher than expectation due largely to the working capital needs for the large-scale projects. The operating margin (operating profit before depreciation and amortization as a percentage of revenue) was 2.38% in 2014 and 3.04% in the first nine months of 2015, decreasing from an average of 5.5% during 2011-2013. TRIS Rating’s base-case scenario, excluding the investment in the 1,280-MW coal-fired power plant project, expects that TTCL’s revenue will be at least Bt19,000-Bt24,000 million per annum during 2015-2018. The operating margin is expected to improve gradually to 5%-6% during 2015-2018. Operating income is expected to rise because the company will receive income from the Ahlone project. Funds from operations (FFO) are expected at Bt600-Bt700 million per annum.
During 2015-2018, TRIS Rating’s base-case scenario expects TTCL’s net debt to equity ratio will stay below 1.2 times. Cash flow protection, as measured by the FFO to total debt ratio and the EBITDA interest coverage ratio, is 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 2015-2018, the FFO to total debt ratio is expected to average around 7%, while the EBITDA interest coverage ratio will hold at 3 times or more.
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