TRIS Rating affirms the company rating on SPCG PLC (SPCG) and its debenture ratings at “A”. The ratings continue to reflect the company’s reliable cash flows from its investment portfolio in solar power projects, its management experience as a pioneer in the solar power business, and the reliable performance of its solar power projects. However, the ratings are constrained by SPCG’s risks in respect to overseas investments to replenish its earnings before interest, tax, depreciation, and amortization (EBITDA), which would elevate its gearing during the build-up phase.
KEY RATING CONSIDERATIONS
Reliable cash flows from investment portfolio
TRIS Rating expects SPCG’s investments in solar power projects will continue to be the major sources of cash flow over 2018-2021. In 2017, solar power projects accounted for about 90% of EBITDA while the remaining 10% was generated from solar roof and other businesses.
SPCG, through its subsidiaries, owns 36 operational solar power plants mostly located in the Northeastern region of Thailand. All of the plants have long-term power purchase agreements (PPAs) with the Provincial Electricity Authority (PEA) and receive a tariff adder of Bt8 per kilowatt-hour (kWh) on top of the normal tariff for 10 years after commencing commercial operation.
The cash flows from the solar power projects are reliable and predictable, because of the tariffs in the contracts and the fact that the payment risk to the buyer is minimal.
Forecast-beating performance
SPCG’s management experience in the solar power business underpins the company's strength. It was the first developer of commercial-scale solar power plants in the country.
SPCG’s performance continues to beat our expectations. In 2017, the actual power generated of 385 gigawatts-hours (GWh) outreached our forecast by 12%. This trend continued in the first half of 2018, with the actual power output of 195 GWh making up for about 57% of our full-year forecast.
Going forward, TRIS Rating believes SPCG will stay on a roll, largely backed by technologically-proven and certified equipment, as well as operating efficiencies. SPCG’s power plants are well-equipped, as the company sources the major equipment, i.e., photovoltaic (PV) modules and inverters, from reputable suppliers, namely Kyocera Corporation (Kyocera) and SMA Solar Technology AG (SMA). Both suppliers also provide SPCG with multi-year warranties covering the efficiency of their products.
TRIS Rating forecasts SPCG would generate about 360-380 GWh of power per year from 36 solar power plants during 2018-2021. This forecast is based on the expected plant performance ratio of around 78% and a 50% probability of energy production (P50). In all, the domestic solar power plants will bring in about Bt4 billion in yearly revenues.
Moreover, SPCG holds minority shares in a 30-megawatt (MW) solar power plant in Tottori, Japan. The project began commercial operation in late April 2018. SPCG should receive about Bt5-Bt6 million in dividend income per year.
SPCG on the need for further expansion
TRIS Rating views that the looming expiration of adder tariffs starting in 2020 through 2025 will induce SPCG to pursue growth. The expiration of the adder scheme will hurt the company’s EBITDA, particularly in 2024-2025. As a result, SPCG inevitably needs to invest in new projects in efforts to entrench its earnings. SPCG is inclined to invest overseas in the wake of limited opportunities in Thailand.
SPCG has planned to further invest in more solar farms in Japan. The company is intent on holding a minority interest in Ukujima Mega Solar Project, a 480-MW power plant with project cost totaling about Bt58 billion. Given the massive scale of investment, the project is developed by 8 participants and scheduled to begin a 4-year construction in 2019. The project carries relatively higher construction risks. Moreover, SPCG is considering to invest in another 65-MW Japan-based solar power project, costing about Bt9.6 billion. TRIS Rating expects that the latter project will be majority-owned by SPCG.
In our view, the execution risks associated with the two projects are manageable, taking into account the low country risk and off-taker risk, as well as, creditability of SPCG’s investing partners.
In our forecast, the two projects would bring in sizable earnings to SPCG from 2022 onwards, which would somewhat offset the declining revenues from domestic solar power plants. Due to higher development costs, the Japan-based projects are expected to yield lower return on investment, relative to SPCG’s existing projects. Looking ahead, SPCG’s pretax return on permanent capital may decline to below 10%.
Leverage likely to rise but considered acceptable
With steady debt repayment, SPCG’s adjusted debt declined to Bt9.1 billion as of June 2018. The ratio of debt to capitalization improved from 52.3% as of 2016 to 41.1% at the end of June 2018. SPCG’s equity base also increased by about Bt1.1 billion from new share issuance to Kyocera Corporation, its strategic partner.
TRIS Rating forecasts SPCG will have a strong capital structure towards the end of 2019, with the debt to capitalization ratio declining to below 25%. However, the ratio could rise again to above 35% in 2021, based on our expectation that SPCG will spend about Bt11.9 billion in capital expenditures to complete the new projects. Such leverage level is deemed acceptable in consideration of the invested projects.
TRIS Rating views that new investments would not deteriorate the company’s capital structure significantly. This is because the company holds cash and cash equivalents of about Bt2.5 billion and securities available for sale of about Bt1.3 billion, which would be one source of funds to invest in new projects. However, the leverage ratio could rise to about 40% should there be any further investments other than the projects in the pipeline during the next three years.
TRIS Rating forecasts the company’s EBITDA to fall in the range of Bt3.5 – Bt4.0 billion per year during 2018-2021. Those EBITDA levels could satisfy the upcoming debt due. In the second half of 2018, about Bt2.4 billion of debentures will be due. Meanwhile, SPCG has Bt2.4 billion in debentures coming due in 2019, Bt1.7 billion in 2020, and Bt2.2 billion in 2021.
RATING OUTLOOK
The “stable” outlook embeds the expectation that SPCG will be capable of maintaining the plant performance ratio at a satisfactory level above 75% over the next three years, leaving the company with EBITDA of at least Bt3.5-Bt4.0 billion per year. SPCG’s financial policy is expected to remain prudent, such that the forthcoming expansions would not markedly hurt its financial flexibility.
RATING SENSITIVITIES
A rating upgrade could occur if SPCG could generate more EBITDA on a sustained basis, which could result from building sound and profit-making assets or earning solid returns from the investments, while SPCG maintains leverage at a manageable level.
On the contrary, a downward rating pressure could develop if solar plant performances drop drastically, which would then considerably weaken SPCG's cash flow. A negative rating pressure could also come from SPCG's excessive use of debt to fund the expansion plans.
COMPANY OVERVIEW
SPCG was founded in 1996 as Solar Power Co., Ltd. (SPC) to develop solar power projects in Thailand. In 2011, the company was listed on the Market for Alternative Investment (MAI), through a reverse listing process, and was renamed SPCG. In 2012, SPCG moved its listing to the Stock Exchange of Thailand (SET).
As of March 2018, the Khunchornyakong family held a 46% interest in SPCG. SPCG is a holding company, investing in 36 solar farms with a combined contracted capacity of 205.92 megawatts (MW). In 2017, solar farms continued to account for the vast majority (71%) of its revenue. About 25% of revenue came from the solar rooftop segment and the rest (4%) came from a sheet metal roofing factory and other businesses.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2018, 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.