TRIS Rating affirms the company rating on TPI Polene PLC (TPIPL) and the ratings on its outstanding senior unsecured debentures at ?BBB+?, with a ?stable? outlook. At the same time, TRIS Rating assigns the rating of ?BBB+? to TPIPL?s newly proposed issue of up to THB3.745 billion senior unsecured debentures. The company intends to use the proceeds to refinance maturing debentures.
The ratings recognize TPIPL?s strong market position in the domestic cement market, its leading position in the low-density polyethylene (LDPE) and ethylene vinyl acetate (EVA) market, and reliable cash flows from its power business. The ratings also take into consideration the merits of the company?s business diversification from these three core businesses and potential benefits from commitments to net-zero carbon emissions.
However, the ratings also factor in the cyclicality of the cement and plastics industries and impacts from the phase-out of additional tariffs (adder) received by its power business. The ratings also take into account the company?s rising financial leverage to support new investments as well as investment risks associated with the Special Economic Zone (SEZ) development project.
TPIPL?s earnings rose to a fresh record in 2021, largely driven by strong performance in the plastic business. The high profitability of the plastics business was largely attributed to the widened spread between the prices of EVA/chemical adhesive products and raw materials, as well as rising demand for the company?s high-grade EVA which is used in the solar panel manufacturing industry in line with the growing renewable energy trend. In the power business, TPIPL?s all power plants using refuse-derived fuel (RDF) continued to perform well and generate solid cash flows. Thanks to full benefits from the installation of additional boilers, the power plants were able to achieve higher output. Since the cement plant has been modernized in the past two years, it is able to use RDF as a replacement for coal by up to 40%, which helps reduce the cost of clinker.
We maintain our view that TPIPL?s performance is likely to come under pressure from the imminent adder expirations, which are due to take effect during 2022-2025. However, the loss of adder revenue is likely to be partly offset by robust performance of the plastics business, expected recovery of the cement business, and higher fuel adjustment charges (Ft).
We project TPIPL?s earnings before interest, taxes, depreciation, and amortization (EBITDA) will be around THB10.5 billion in 2022 with possible earnings upsides from several projects the company is undertaking. The key projects include expansion of EVA production capacity, ongoing efficiency enhancement of existing power plants, coal-to-RDF replacement programs in cement production and the power plants, and proposals for new power purchase agreements (PPA) for its 70-megawatt coal/RDF power plant. Assuming the full potential benefits from these projects, the company?s management expects to achieve EBITDA of THB13-THB14 billion per year in 2022-2023.
We expect TPIPL to incur additional capital expenditures over the next 2-3 years to support its cost-saving projects and future investments in waste-to-energy (WTE) power plants. Construction is currently underway on two new WTE power plants in Songkhla and Nakorn Ratchasima and the company plans to participate in bidding for new WTE projects nationwide. With respect to the SEZ project, the project has been postponed temporarily and is subject to the government?s final decision. As a result, the company has no plans to make any additional investments in the SEZ project for the time being. The company believes the project must be continued as it is the national security project, and it has already been approved by the cabinet. We expect that the company?s financial strength, measured by net debt to EBITDA ratio and funds from operations to net debt ratio, will weaken but we believe the ratios will stay in a level commensurate with the assigned ratings.
RATING OUTLOOK
The ?stable? outlook reflects our expectation that TPIPL will maintain its competitive positions in the cement and plastics businesses. At the same time, its power business will likely continue to deliver satisfactory performance and maintain its cash-flow contribution. We also expect the company will successfully secure new power projects to partially compensate the drop-off in adder revenue. Its overall operating performance and financial leverage should be in line with our base-case forecast.
RATING SENSITIVITIES
The prospect of a rating upgrade is limited in the near term due to the likelihood of declining cash flows and the continuation of heavy capital spending over the next three years. Nonetheless, a rating upgrade could occur if TPIPL is able to achieve the targets of its efficiency enhancement measures and/or successfully secure adequate power purchase agreements to offset the impact of adder expirations. Other factors influencing an upgrade are financial deleveraging to the effect that the company?s debt to EBITDA ratio falls below 6 times for a sustained period, and TPIPL?s diversification of its sources of borrowings.
The ratings and/or outlook could be revised downward if TPIPL?s net debt to EBITDA ratio stays above 8 times for a sustained period. This could happen following a substantial decline in earnings and/or excessive debt-funded investments. A significant equity loss from pending legal claims could also trigger a negative rating action.
RELATED CRITERIA
- Key Financial Ratio and Adjustments for Corporate Issuers, 11 January 2022
- Issue Rating Criteria, 15 June 2021
- Group Rating Methodology, 13 January 2021
- Rating Methodology ? Corporate, 26 July 2019
TPI Polene PLC (TPIPL)
Company Rating: BBB+
TPIPL228A: THB3,745 million senior unsecured debentures due 2022 BBB+ TPIPL231A: THB3,000 million senior unsecured debentures due 2023 BBB+ TPIPL231B: THB4,382.7 million senior unsecured debentures due 2023 BBB+ TPIPL234A: THB2,640.5 million senior unsecured debentures due 2023 BBB+ TPIPL241A: THB4,000 million senior unsecured debentures due 2024 BBB+ TPIPL244A: THB4,127 million senior unsecured debentures due 2024 BBB+ TPIPL24NA: THB3,515.3 million senior unsecured debentures due 2024 BBB+ TPIPL251A: THB2,888 million senior unsecured debentures due 2025 BBB+ TPIPL256A: THB4,000 million senior unsecured debentures due 2025 BBB+ TPIPL25NA: THB3,410.7 million senior unsecured debentures due 2025 BBB+ TPIPL264A: THB4,000 million senior unsecured debentures due 2026 BBB+ TPIPL269A: THB4,000million senior unsecured debentures due 2026 BBB+ Up to THB3,745 million senior unsecured debentures due within 7 years BBB+ Rating Outlook: Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: +66 0 2 098 3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2022, 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 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 www.trisrating.com/rating-information/rating-criteria