TRIS Rating Co., Ltd. has affirmed the company rating of Sahaviriya Steel Industries PLC (SSI) at “BB+” and has revised the outlook to “positive” from “stable”. The rating reflects a strong domestic market position, a market protected by quotas and tariffs, and a variable cost structure that enhances production flexibility. These strengths are tempered by high competition, the cyclical nature and high price volatility of the steel industry, short-term customer contracts lasting one to three months, and a single production facility with limited product line. The “positive” outlook reflects SSI’s faster-than-expected recovery due to strong shipments albeit at negative margins. TRIS Rating expects that SSI’s operating performance will further improve in the near term backed by strong sales volume and lower domestic competition. The company is also expected to continue to secure sufficient margins and manage working capital to generate adequate cash flow throughout a volatile pricing cycle in the industry.
TRIS Rating reported that there are three manufacturers of hot rolled coil (HRC) in Thailand. SSI is the market leader in terms of production and sales volume. For the first nine months of 2009, SSI’s market share in the domestic market increased to 39%, compared with 22% in the same period of the prior year. SSI gained market share as its competitors lost their competitive edge due to financial difficulties and less imports of HRC. Unlike integrated steel mills and mini-mills, SSI does not manufacture steel; the company processes semi-finished steel slabs into flat-rolled coils. SSI owns a single production facility located close to a deep-sea port in Prachuap Khirikhan province. The seaport location was strategically chosen to cut transportation costs for both raw materials and finished steel products. Domestic sales accounted for 88% of total shipments in the first nine months of 2009. The Thai steel industry is somewhat protected by government policies. Local producers benefit from anti-dumping (AD) tariffs ranging from 3.45% to 128.11% on products imported from 14 countries. However, local producers are prone to be negatively affected by the influx of low cost steel from countries not subject to anti-dumping tariffs, particularly China.
TRIS Rating said, SSI’s operational risk stems from the concentration of operations in a single production facility. Any unplanned shutdown could impact cash flow. In addition, the lack of vertical integration and product diversity exposes the company to the volatility of demand and supply for slabs and HRC in the world market. The lack of upstream production causes the company to stock a broad range of slabs to meet customers’ needs. This exposes SSI to inventory holding risk and a high working capital requirement. Nonetheless, SSI benefits from a cost structure with high variable costs, which allows for production flexibility. The company can adjust its production schedule to match the market environment. In addition, the increasing of SSI’s stake in the Thai Cold Rolled Steel Sheet PLC (TCRSS) to 50.15% should help strengthen its market position by increasing the distribution channel for its premium grade products once the automobile industry recovers.
SSI’s operating performance in the first nine months of 2009 was weak. The performance was heavily impacted by high raw material costs in 2008 that carried into 2009. Funds from operations (FFO) was Bt-4,360 million with an operating margin before depreciation and amortization expenses of -15.9%. However, performance for the fourth quarter is expected to be good based on a rise in orders and improved operating margins as the high cost raw materials are used up. The company expects that shipments in the fourth quarter will reach 600,000 tonnes which will be the highest quarterly shipment volume in the past three years. It is likely that SSI will have a huge operating loss for 2009. However, the reversal of the provision for inventory losses will keep the company in the black. Should the company be able to maintain its competitive edge in the domestic market and the government enacts economic stimulus packages which support steel demand, SSI would recoup all its losses by 2011.
Although FFO was negative in the first nine months of 2009, SSI’s operating cash flow was positive from cash inflows generated from a lower level of working capital. As of September 2009, the company’s outstanding debts stood at Bt17,264 million, down from Bt23,858 million as of December 2008 due to a drop in steel prices and lower level of slab and coil inventory. The total debt to capitalization ratio as of September 2009 declined to 50.85%, compared with 58.70% as of December 2008. Based on its good relationships with lenders, SSI has received good support during the recent cyclical downturn. SSI received waivers for the breaches of the debt service coverage ratio and interest coverage ratio covenants. In addition, the company was able to rollover its short-term working capital facilities, said TRIS Rating. -- End
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