TRIS Rating has assigned the rating of “BBB” to the proposed issue of up to Bt2,000 million in senior unsecured debentures of Siamgas and Petrochemicals PLC (SGP). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of SGP at “BBB”. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance SGP’s existing debts and for working capital.
The ratings continue to reflect the company’s strong position as the second-largest liquefied petroleum gas (LPG) distributor in Thailand, its robust domestic distribution network, and its geographically diverse customer base. The ratings, however, are partially offset by higher business risk from SGP’s operations abroad which expose the company to fluctuations in LPG prices.
The “stable” outlook reflects the expectation that SGP will be able to maintain its strong position as the second-largest LPG distributor in Thailand. Reliable cash flows from LPG operations in Thailand will partly alleviate the volatile margin of overseas operations.
The upgrade potential is likely to be limited in the medium term due to larger exposure to the price risk inherent in the global LPG market. However, the rating may be upgraded if the company’s funds from operations (FFO) become larger and more stable, or if the debt to capitalization ratio is controlled at a low level for an extended period.
The ratings could be revised downward if SGP’s financial profile materially deteriorates for an extended period. This could arise if the EBITDA interest coverage and/or FFO to total debt ratio significantly falls below TRIS Rating’s expectation or if there are large debt-funded acquisitions, leading to significantly weaker financial profile.
SGP was established by the Weeraborwornpong family in 2001, and was listed on the Stock Exchange of Thailand (SET) in 2008. As of September 2016, the Weeraborwornpong family remained the largest shareholder, holding 61% of the company’s shares.
SGP’s business profile in Thailand is strong. The company has remained the second-largest LPG distributor in Thailand. Its operations in Thailand cover LPG trading under the “Siam Gas” and “Unique Gas” brands which held about 24.0% market share, by LPG trading volume, behind PTT PLC (PTT) which had a 38.5% market share as of September 2016. SGP’s distribution network is considered strong, supported by eight LPG storage terminals and a sizeable number of filling and service stations. SGP also owns land and sea freight transportation facilities which support its operation in Thailand. SGP’s LPG trading activities in Thailand have generated solid cash flows over the past five years. However the company’s earnings in Thailand have declined due primarily to a decrease in sales volumes of LPG in the cooking and the automotive segment.
The ratings also take into consideration SGP’s competitive advantages in overseas markets, which SGP entered in 2010. The company established its LPG trading business in China, Vietnam, Singapore, and Malaysia, and operates off-shore trading in East Asia. The company owns two large storage caverns in China, capable of storing 300,000 tonnes of LPG, and a 45,000 deadweight tonnage (DWT) of floating storage in Singapore to support its off-shore trading operations. The trading operation outside Thailand provides benefits of geographical diversification and growth opportunities. However, the company’s business risk has increased materially due to greater exposure to the price volatility of LPG in the global market.
To lessen impacts from uncertainty of LPG prices, SGP announced its investment in a 230-MW power plant in Myanmar In July 2016. The investment was worth about US$48 million, allowing it to hold 30% of total shares in the project. The transaction is expected to be completed in first half of 2017. The size of equity income is estimated to be between Bt150-Bt200 million per annum.
SGP’s increasing overall business risk involves the company’s larger exposure to price uncertainty and competition in the Chinese market. The portion of volumes sold internationally rose to 66% in the first nine months of 2016, compared to 63% in 2015 and 53% in 2014. The sales volumes of LPG in Thailand was 0.75 million tonnes in the first nine month of 2016, declining by 3.7% year-on-year (y-o-y), but improving from a 7.3% y-o-y drop in 2015. The curtailment of sales volumes was still a result of from a contraction in demand in the automotive sector, whereas the demand in the cooking and industrial segments were stable. In contrast, sale volumes in the international market grew rapidly to 1.49 million tonnes, up by about 20.6% in the first nine months of 2016. About 72% of growth was contributed by consumption in the Chinese market. In September 2016, the volumes distributed in China accounted for 54% of total volumes sold aboard.
Given continual expansion in the overseas market, in TRIS Rating’s view, SGP’s business will be increasingly exposed to price risks of the global LPG market. However, the currently low level of LPG price is likely to be beneficial to the SGP’s business in short term as it limits downside risks of further drops in LPG price and thus makes SGP’s operating performance less volatile than in the past.
TRIS Rating’s base-case scenario assumes that SGP’s revenue growth will be about 5%-8% per year in the medium term, driven by a price recovery. The demand for LPG aboard is likely to increase, supported by its cheap price. Over the next three years, the overseas trading segment will account for approximately 65%-70% of total volume. FFO is expected to be volatile but range around Bt1,500-Bt2,000 million per annum. The debt to capitalization ratio is expected to surround 50%. The company’s liquidity is adequate. SGP’s earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio is expected to stay above 5 times and the FFO to total debt ratio should be able to stay above 15%.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2016, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating-information/rating-criteria.html.