TRIS Rating has affirmed the company and senior unsecured debenture ratings of TPI Polene PLC (TPIPL) at “BBB+” with “stable” outlook. The ratings reflect TPIPL’s strong competitive position in the domestic cement market, leading status in LDPE (Low-Density Polyethylene) and EVA (Ethylene Vinyl Acetate), and adequate product diversification. 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 weakening balance sheet following aggressive investment plans.
The ratings also incorporate steady cash flow generation and high profitability from TPIPL’s power segment, which is supported by long-term power purchase agreements (PPAs) with the Electricity Generating Authority of Thailand (EGAT) and adder rates the company received. The revenue contribution from the power segment is expected to help counterbalance recently unfavorable market conditions in the cement industry and volatility in the plastic segment, and thus enhancing stability of earning. However, the ratings were constrained by TPIPL’s limited record in managing large refuse-derived fuel (RDF) fired power plants.
The “stable” outlook reflects the expectation that the competitive position in TPIPL’s cement and plastic segments will remain. The operations of its power plants will be more stable, enhancing the overall profitability and cash flow base. TRIS Rating expects TPIPL to diversify sources of lending and improve relationship with financial institutions over time.
The ratings 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. Unfavorable circumstances such as further delays in the government’s projects or lower-than-expected performance of TPIPL’s power plants would negatively impact TPIPL’s operating performance and the company’s ratings.
Conversely, TPIPL’s ratings or outlook could be revised upward if TPIPL’s projects run smoothly and the company could strengthen its financial profile with a solid cash flow generation and a substantial decrease in the debt. These could be evidenced by the FFO to total debt ratio at around 15% and the debt to capitalization ratio staying below 30%.
TPIPL was founded by the Leophairatana family in 1987. As of March 2016, the family owned approximately 56% of the company’s shares. The company currently operates in three industries: cement, plastic and power generation. Total revenue in 2015 was Bt28.3 billion. Revenue from the cement segment accounted for about 60% of the total revenue, while the plastic and power segments represented about 20% and 10% of the total revenue, respectively.
TPIPL’s business profile is moderate. The company is the third-largest cement producer in Thailand. After the fourth-cement plant started operation in February 2016, TPIPL’s cement production capacity increased to 13.5 million tonnes per annum, accounting for 20% of total market share by capacity. 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.
TPIPL is one of Thailand’s leading LDPE and EVA producers, with a production capacity of 158,000 tonnes per annum. In 2015, 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 risks in the plastic segment reflects the exposure to a single ethylene supplier, price volatility of petrochemical products, challenges from substitution products, technological changes, and global competitors.
In the power segment, TPIPL’s subsidiary, TPI Polene Power PLC (TPIPP), has waste-to-energy (WTE) power plants with the largest installed capacity in Thailand. The power plants, using RDF and waste heat recovery from the cement factories as energy sources, had total capacity of 150 megawatts (MW) in June 2016. TPIPL’s two main RDF-fired power plants, totaling 80 MW, sell electricity to the EGAT under Small Power Producer (SPP) scheme with PPAs totaling 73 MW. The company is expected to receive another 90-MW PPA when 100-MW RDF-fired power plant achieves its scheduled commercial operation date in early 2017. All PPAs offer adder rate of Bt3.5 per unit over a 7-year term.
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 has faced adverse effects from a change in accounting policy since January 2016. The company had to add depreciation on revaluation of surplus about Bt1.3-Bt1.4 billion per year in the profit and loss statements, leading to report net losses in the first quarter of 2016. However, the company plans to change its accounting method in order to eliminate this depreciation and revaluation surplus after initial public offering (IPO) of TPIPP was planned in the last quarter of 2016. The revaluation surplus is expected to be partly replaced by rising equity from the IPO.
In the first quarter of 2016, TPIPL’s operating performance was driven by rising revenue contribution from the power segment. The revenue rose by 13.9% year-on-year (y-o-y) to Bt8.18 billion. The operating margin (before depreciation and amortization) was 12.3%, compared with 7.5% over the same period of 2015. The funds from operation (FFO) increased to about Bt0.78 billion, surging by 196% y-o-y. The performance of its two power plants selling electricity to EGAT continued to improve as evidenced by an increase in power output per month, a reduction of unplanned shutdown and improving efficiency of RDF extraction units. The performance of the plastic segment recovered gradually due to better spread of EVA, compared with a three-year average. In contrast, TPIPL’s cement segment has weakened, pressured by new cement supply from its fourth cement plant and slowdown of construction activities in the private sector. TPIPL has attempted to release its new volumes by accelerating export of clinker. Despite a rise in total sales volume in the cement segment, its average price was softened and the company’s operational profit in this segment has been declining.
During 2016-2018, TRIS Rating’s base-case expects TPIPL’s revenue will grow to Bt38.0-Bt40 billion, assuming that the 100-MW RDF-fired power plant will start in early 2017 as planned, and domestic cement demand will improve gradually after the accelerated approvals of the government infrastructure projects. Due to high profitability of power plants, overall operating margin is expected to improve to 17%-19%. The FFO is estimated to reach between Bt4.5-Bt5 billion over the next three years.
TPIPL’s leverage is heightened, affected by material capital spending of about Bt24 billion during 2013-2015. As of March 2016, the debt to capitalization ratio continued to rise to 41.7%, slightly exceeding TRIS Rating’s credit guidance. TPIPL’s bonds, totally worth about Bt29.5 billion, accounted for 75% of total debt approximately in March 2016. The amount of bond increased to Bt32 billion in June 2016. Concentration on bonds reflects the company’s larger exposure to refinancing risks and liquidity risks in bond bullet payments. The scheduled bond repayments will be Bt3 billion in 2017 before rising to around Bt5-Bt5.75 billion per annum during 2018-2021.
However, TPIPL is expected to successfully raise funds via an issuance of TPIPP’s IPO by 2016. The proceed is expected to be primarily used for funding its capital expenditure which is estimated to be Bt13-Bt14 billion and repay some debts. Thus, its debt to capitalization ratio should be maintained at around 40% or lower during the period of projection. The main projects being invested include a 150-MW coal-fired power plant (Bt7.3 billion), 70-MW RDF-fired power plant (Bt3.3 billion), coal/RDF fired power plants (Bt0.9 billion), RDF capacity expansion (Bt1.45 billion), and modification of waste heat-fired power plants (Bt0.73 billion). TRIS Rating anticipates that TPIPL will control its debt to capitalization ratio not above 40% for an extended period in order to be commensurate with the “BBB+” ratings. The postponement of the IPO, while TPIPL continues to invest, will cause further deterioration in its financial profile and thus may trigger a negative rating action. FFO to total debt is expected to stay above 15%, while earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio should stay above 4 times once its power plants are fully operated.
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