TRIS Rating has lowered the company rating of Tirathai PLC (TRT) to “BBB” from “BBB+” with “stable” outlook. The downgrade reflects the company’s weakening operating performance and a rise in financial leverage. The “BBB” rating continues to reflect the company’s leading position in domestic electrical transformer market and its capability of producing both power and distribution transformers across a diverse range of capacities and system voltages. The rating also incorporates the promising demand of electricity in Thailand and TRT’s opportunities in export markets. However, the strengths are partially offset by the intensifying competition and TRT’s worsening financial profile.
The “stable” outlook reflects the expectation that TRT will maintain its competitive position in the electrical transformer industry. TRT is expected to secure more orders and strengthen its profitability on the back of the market overturn. Moreover, TRT’s subsidiaries are expected to generate acceptable earnings and cash flows. TRT’s rating or outlook could be upgraded if its operating performance improves significantly, the total debt to capitalization stays below 45%, and operating margin improves to 10%-15% on a sustainable basis. On the contrary, the rating and/or outlook could be revised downward should TRT’s operating performance and its financial leverage deteriorate further.
Founded in 1987, TRT is a top manufacturer of made-to-order transformer and service provider of transformer installation and maintenance. TRT was listed on the Market for Alternative Investment (MAI) in May 2006. Mr. Sumpan Vongphan, the managing director, and the key managers are the company’s major shareholders, with a combined stake of 29% as of December 2015. The company has diversified into the assembling of hydraulic crane trucks and customized metalwork through its subsidiaries.
TRIS Rating lowers the rating of TRT in the wake of the company’s weakened operating performance in recent years and its elevated financial leverage. TRT’s consolidated revenue remained stagnant in 2015 after a hefty 15% decline in the prior year. In 2015, TRT ended the year with a net loss, chiefly on account of its misstep in an offshore project undertaken by its subsidiary. Moreover, TRT carried a large amount of accounts receivable. The underperformance, accompanied with a larger-than-expected working capital, has worsened TRT’s capital structure and cash flow protection as the company incurred a record level of debts.
The current rating reflects TRT’s leading position in the domestic market of electrical transformers. TRT is one of a few transformer manufacturers in Thailand which is capable of producing both power and distribution transformers. TRT’s power transformers have capacities of up to 300 megavolt-amperes (MVA), at system voltages of up to 230 kilovolts (kV). The distribution transformers range in capacity from 1 kilovolt-amperes (KVA) to 10 MVA, at system voltages of up to 36 kV. TRT is amongst a few qualified transformer producers to sell power transformers to state enterprises. Moreover, TRT’s competitive position is strengthened as it holds a license from Siemens, a world-renowned transformer maker. Under the terms of the license agreement, Siemens provides support for TRT’s product designs and serves as a market reference for TRT’s power transformers. The rating also reflects the country’s promising demand for electricity, which leads to a sustained growth in electricity generation and additional investment in energy infrastructures. These will benefit TRT’s core business. Moreover, the rating embeds TRT’s opportunities in export markets, particularly the countries with robust electricity demands.
Conversely, the rating is partially offset by the intensifying competition. There are two segments in the electrical transformer market -- power transformer and distribution transformer. Competition in the power transformer segment is less intense than the distribution transformer segment. However, the competition in the power transformer industry has increased over the past few years. Reasons for increased competition include imported products from Chinese manufacturers holding licenses for internationally-known brand names, a capacity expansion by a local power transformer maker, and a newcomer expanding out of the distribution transformer segment. However, the competitive pressures have eased to some extent, following the introduction of a considerable import tariff.
TRT’s operating performance considerably weakened in 2015. TRT’s total revenue was Bt2.22 billion, up slightly from Bt2.13 billion a year earlier. The sluggish revenue was primarily caused by delayed biddings at state enterprises and slowing private investments. TRT’s profitability markedly weakened. The operating margin before depreciation and amortization deteriorated from 6.7% in 2014 to 0.1% in 2015. The significant drop in profitability in 2015 was due to squeezed margin, a huge loss from a subsidiary, and rises in selling and administration expenses. In 2015, TRT incurred loss from its subsidiary, LDS Metal Work Co., Ltd. (LDS), amounting to Bt77 million as a result of cost overrun in the EPC (engineering, procurement, and construction) of the conveyor belt in the Hongsa power plant. This project is worth Bt448 million which generated service revenue of Bt216 million in 2014 and Bt232 million in 2015. TRT recorded a gain of Bt58 million in 2014 but posted a loss of Bt77 million in 2015. As a result, TRT’s funds from operations (FFO) declined from Bt200 million in 2014 to Bt45 million in 2015. Earnings before interest, tax, depreciation and amortization (EBITDA) also dropped from Bt170 million to Bt44 million during the same period.
At the end of 2015, TRT’s total debt surged to Bt1.35 billion from Bt961 million at the end of 2014, as a result of escalated accounts receivable and debts financing for its capacity expansion. The total debt to capitalization increased from 45% at the end of 2014 to 55.6%. The sharp increase in accounts receivable was mainly attributable to overseas transactions. The collection is expected in early 2016; hence total debt is expected to decline. Cash flow protection weakened significantly in 2015. EBITDA interest coverage ratio was a record low of 0.8 times in 2015, compared with 3.7-7.3 times during 2013-2014. FFO to total debt ratio was weak at 3.3% in 2015, compared with 20.8%-38.9% during 2013-2014.
Going forward, TRT’s financial performance is expected to improve once the state enterprises resume normal scheduled biddings and private sector investment rebounds. Additionally, TRT had a backlog of Bt1.68 billion at the end of 2015. About 95% of the backlog is scheduled to be delivered in 2016. Moreover, TRT is in a bidding process for new orders worth approximately Bt9 billion. From its past track record, TRT’s bidding success ratio was about 15%. Under TRIS Rating’s base-case scenario, TRT’s revenue is expected to grow in a range of Bt2.8 billion to Bt3.2 billion per year over the next three years. EBITDA is expected to improve to almost Bt300 million per year. The debt to capitalization ratio is expected to hover around 50% in 2016-2018.
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