TRIS Rating Co., Ltd. has affirmed the company rating of Sahaviriya Steel Industries PLC (SSI) at "BBB" and at the same time has assigned "BBB" ratings to SSI's senior secured debentures totalling Bt2,530 million. The rating outlook of SSI has been revised to "negative" from "stable". The ratings reflect SSI's leading domestic market position in flat steel products, regulatory protection in terms of quotas and tariffs, and acceptable domestic demand for steel products. These strengths are tempered by the highly competitive and cyclical nature of the steel industry, increased competition from both local manufacturers and imports, intensive use of working capital, exposure to short-term contracts (one to three months) and limited operating diversity.
The "negative" outlook reflects the worse-than-expected financial profile of the company. The rating will be lowered if the difficult market conditions continue or SSI's efforts to resolve its excess inventory are unsuccessful, which would cause its financial profile to be weaker than the appropriate level for the rating.
TRIS Rating reported that SSI is the largest manufacturer of hot-rolled coils (HRCs) in Thailand, with total production capacity of 4 million metric tonnes (MT) per year. SSI processes semi-finished steel slabs into flat-rolled coils. The company has a single production facility located in Prachuap Khirikhan province, which is close to a deep-sea port. The sea port's location benefits SSI by reducing transportation costs for both raw materials and finished steel products. SSI's main focus is on the domestic market, which accounted for 92% of total sales in 2004. The long term favorable outlook for the construction industry, due to government policy to create many mega projects, will benefit SSI because around 46% of its revenue generation is from the construction industry. Competition in the local market is expected to be more intense from the re-entry of two HRC producers and imports. Local producers continue to benefit from the Thai government's anti-dumping measures to charge tariffs that range between 3.45% to 128.11% for imported products from 14 countries. However, the influx of low cost steel imports from countries not subject to anti-dumping, particularly China, will have a significant effect on business operations of local producers.
SSI's business risk arises from its concentration of operations in a single facility, which may lead to long-period unplanned shutdowns that would significantly impact its cash flow. In addition, the lack of vertical integration and product diversity expose the company to the volatility of supply and demand of slabs and HRCs in the world market. The large amount of slabs with different specifications that SSI has to stock to meet customers' order requirements leads to a high working capital requirement and a high interest burden as interest rates rise. Furthermore, the lack of long-term sales contracts exposes the company to volatility in both volume and sales prices. SSI's average selling price fell from US$628 per MT in the first quarter of 2005 to US$520 per MT in the third quarter of 2005. Nonetheless, SSI has an advantage from flexible cost structure that allows it to adjust production to correspond with the market situation.
SSI's financial performance for the first nine months of 2005 was far below TRIS Rating's expectations. Operating revenue totaled Bt29,218 million while the operating margin declined to 6.9%, from 19.2% posted during the first three quarters of 2004. The decline in operating margin was underpinned by a continuous decline of HRC selling prices since the beginning of 2005, high slab costs and a provision for the diminution in value of raw materials (Bt597 million) and finished goods (Bt327 million). SSI's large stock of raw materials on hand surged its inventories from Bt11,827 million at the end of 2004 to Bt28,974 million as of September 2005. These inventories were funded by revolving credit facilities provided by various banks. The higher-than-expected outstanding debt (Bt12,278 million at the end of 2004 versus Bt30,952 million in September 2005) resulted in a deteriorated of fund from operations to total debt ratio to 7.64%, and the total debt to capitalization ratio increased to 60.56%. The ratio of earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage fell from 16.18 times as of December 2004 to 3.34 times as of September 2005, said TRIS Rating. -- End
Sahaviriya Steel Industries PLC (SSI) Company Rating: Affirmed at "BBB" Issue Ratings: SSI073A: Bt1,080 million senior secured debentures due 2007 BBB SSI083A: Bt1,450 million senior secured debentures due 2008 BBB Rating Outlook: Negative
The "negative" outlook reflects the worse-than-expected financial profile of the company. The rating will be lowered if the difficult market conditions continue or SSI's efforts to resolve its excess inventory are unsuccessful, which would cause its financial profile to be weaker than the appropriate level for the rating.
TRIS Rating reported that SSI is the largest manufacturer of hot-rolled coils (HRCs) in Thailand, with total production capacity of 4 million metric tonnes (MT) per year. SSI processes semi-finished steel slabs into flat-rolled coils. The company has a single production facility located in Prachuap Khirikhan province, which is close to a deep-sea port. The sea port's location benefits SSI by reducing transportation costs for both raw materials and finished steel products. SSI's main focus is on the domestic market, which accounted for 92% of total sales in 2004. The long term favorable outlook for the construction industry, due to government policy to create many mega projects, will benefit SSI because around 46% of its revenue generation is from the construction industry. Competition in the local market is expected to be more intense from the re-entry of two HRC producers and imports. Local producers continue to benefit from the Thai government's anti-dumping measures to charge tariffs that range between 3.45% to 128.11% for imported products from 14 countries. However, the influx of low cost steel imports from countries not subject to anti-dumping, particularly China, will have a significant effect on business operations of local producers.
SSI's business risk arises from its concentration of operations in a single facility, which may lead to long-period unplanned shutdowns that would significantly impact its cash flow. In addition, the lack of vertical integration and product diversity expose the company to the volatility of supply and demand of slabs and HRCs in the world market. The large amount of slabs with different specifications that SSI has to stock to meet customers' order requirements leads to a high working capital requirement and a high interest burden as interest rates rise. Furthermore, the lack of long-term sales contracts exposes the company to volatility in both volume and sales prices. SSI's average selling price fell from US$628 per MT in the first quarter of 2005 to US$520 per MT in the third quarter of 2005. Nonetheless, SSI has an advantage from flexible cost structure that allows it to adjust production to correspond with the market situation.
SSI's financial performance for the first nine months of 2005 was far below TRIS Rating's expectations. Operating revenue totaled Bt29,218 million while the operating margin declined to 6.9%, from 19.2% posted during the first three quarters of 2004. The decline in operating margin was underpinned by a continuous decline of HRC selling prices since the beginning of 2005, high slab costs and a provision for the diminution in value of raw materials (Bt597 million) and finished goods (Bt327 million). SSI's large stock of raw materials on hand surged its inventories from Bt11,827 million at the end of 2004 to Bt28,974 million as of September 2005. These inventories were funded by revolving credit facilities provided by various banks. The higher-than-expected outstanding debt (Bt12,278 million at the end of 2004 versus Bt30,952 million in September 2005) resulted in a deteriorated of fund from operations to total debt ratio to 7.64%, and the total debt to capitalization ratio increased to 60.56%. The ratio of earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage fell from 16.18 times as of December 2004 to 3.34 times as of September 2005, said TRIS Rating. -- End
Sahaviriya Steel Industries PLC (SSI) Company Rating: Affirmed at "BBB" Issue Ratings: SSI073A: Bt1,080 million senior secured debentures due 2007 BBB SSI083A: Bt1,450 million senior secured debentures due 2008 BBB Rating Outlook: Negative