TRIS Rating has downgraded the company rating of The Union Mosaic Industry PLC (UMI) to “BB+” from “BBB-” with “stable” outlook. The rating downgrade reflects deterioration in UMI’s operating performance, resulting from declining demand in the domestic tile market and heightening competition from imported tiles. The weak market led to a sharp fall in UMI’s sales volume and a decrease in the operating profit margin. The rating downgrade also takes into consideration the slower-than-expected recovery of the performance of T.T. Ceramic PLC (TTC). The operating losses of TTC have weakened UMI’s overall profitability since UMI acquired TTC in mid-2012. Due to currently weak market condition, the company’s plan to turn TTC around will take longer time than initially expected. The company is still exposed to volatile energy prices which have a significant effect on the company’s profitability. However, the rating continues to reflect UMI’s business strength, supported by moderate market share, accepted brand names, and lengthy track record.
The “stable” outlook reflects the expectation that UMI’s sales revenue and operating margin will be in line with TRIS Rating’s base-case scenario. UMI’s rating or outlook could be revised upward if the sales volume and the operating margin improve significantly from the current level or if UMI’s financial profile strengthens to the level prior to the acquisition of TTC. In contrast, the rating or outlook could be revised downward if UMI’s operating performance is significantly lower than TRIS Rating’s base-case forecast for an extended period.
UMI is a manufacturer and distributor of ceramic tiles in Thailand. The company was established in 1973 and was listed on Stock Exchange of Thailand (SET) in 1989. UMI has two significant subsidiaries, TTC and The Royal Ceramic Industry PLC (RCI). UMI acquired TTC in July 2012 and held about 66.7% of TTC’s share as of June 2016. UMI acquired about 32.3% of RCI in June 2012. The company started divesting RCI in June 2015 and sold its entire stake by the end of June 2016. Excluding RCI, UMI’s product brands include Duragres, Duragres-lila, and Cergress. UMI’s products have been distributed in Thailand for over 30 years. Its products focus on the middle- to high-end market segment. Nearly all of UMI’s sales are derived from the local market. The company distributes its products mainly through several leading home improvement retailers. The combined sales volume of UMI and TTC was approximately 19.6 million square meters (sq.m.) of tile in 2015.
TRIS Rating views that the divestiture of RCI benefits UMI. By selling its shares in RCI during an economic slowdown, the company receives a large cash inflow and avoids further losses from RCI’s operation. However, the divestiture affects UMI’s business profile because UMI’s business scale will be smaller. UMI’s market share, by sales revenue, is estimated to fall to about 11% from 15% and its total production capacity will drop to 28 million sq.m. per year from 34 million sq.m. per year.
UMI’s performance in 2015 was weaker than expected. Revenue in 2015, including TTC and RCI, was Bt3,739 million, down by about 11.3% year-on-year (y-o-y). UMI’s sales volume in 2015 slipped to 23.6 million sq.m., a 10.3% y-o-y decline, larger than the 4.3% drop in sales volume for the tile industry. The softer demand was due primarily to a slowdown in construction activity, particularly in the residential and commercial property sectors. The market competition has intensified, as seen from the price competition and rising imports of Chinese porcelain tile. The contraction in tile demands also led UMI and its subsidiaries to shut down some production lines. The company had to record Bt141 million of shutdown costs in 2015. In addition, TTC continued to report operating losses, caused by a low utilization rate and severe competition from imported tile. As a result, UMI’s operating margin (before depreciation and amortization) remained low at 4.9% in 2015, compared with 11.3% prior to the acquisition of TTC in 2011. UMI also recorded an asset impairment charge of Bt114 million for TTC’s assets in 2015. The charge also put UMI to a material net loss of Bt190 million in 2015.
In the first three months of 2016, UMI’s revenue, excluding RCI, was Bt751 million, a 9.9% y-o-y drop. UMI’s sales volume, excluded RCI, also fell, slipping to 4.63 million sq.m., a 13.4% y-o-y drop. However, the drop in natural gas price lifted UMI’s operating margin to 12%, higher than the three-year average of 5.3%. TRIS Rating notes that there is downside risk that the natural gas price will increase as the oil prices rise, and the company may have to book shutdown cost again should its sales volume and utilization rate remain low.
UMI’s financial leverage is improving. As of March 2016, total debt stood at Bt1,482 million, mainly comprised an outstanding bond of Bt600 million and TTC’s restructured debt of Bt829 million. The company has repurchased some of its bond every year since the issuance. The debt to capitalization ratio decreased to 44.6% in March 2016 from a peak of 52.6% in 2013. After completing the divestiture of RCI and paying a dividend, UMI’s cash on hand is expected to be about Bt300 million. The company plans to repurchase Bt100-Bt150 million worth of outstanding bond by this year.
However, UMI’s liquidity risk is heightening since its existing bond of Bt600 million will be due in July 2017. The annual capital expenditures are estimated at Bt80 million. Whereas UMI’s sources of funds over the next 12 months include estimated funds from operations (FFO) of Bt180-Bt200 million and cash on hand of approximately Bt300 million. Thus, UMI is expected to have to refinance part of the outstanding bond issue with a new bond or bank loans.
Under TRIS Rating’s base-case forecast, UMI’s revenue, after the divestment of RCI, would stay at Bt2,800-Bt2,900 million over the next one or two years. The operating margin will be low, hovering between 5%-5.5%, reflecting TTC’s lingering weakness, low utilization rate, and looming shutdown of some kilns. The debt to capitalization is expected to stay below 40%, underpinned by the ongoing bond repurchases and no material capital expenditures. FFO to total debt ratio is expected to range between 12%-15% over the next two years.
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