Fitch upgrades SCG’s long-term outlook

Fitch Ratings Thailand has upgraded the national long-term rating and senior unsecured rating of Siam Cement Group Plc (SCG) from A(tha) to A+(tha) and retained a stable outlook on the firm.

Fitch assigned the company’s new senior unsecured debentures of up to 30 billion baht due in 2022 a national long-term rating of A+(tha). According to Fitch, the debenture proceeds will be used to refinance existing debt and fund the company’s capex and investments.

The rating upgrade reflects the diversification of the company from cement and building materials (CBM) to chemicals, as well as its financial profile improvement.

The strength of the chemicals business, combined with lower capex, has led to a significant financial profile improvement over the last few years.

Key in the improved rating was the company’s decrease in leverage. Fitch expects SCG to maintain its FFO adjusted net leverage below 2.8 times in the medium term.

SCG’s strong cash flow generation from a robust performance in chemicals and a delay in capex in 2017 resulted in a lower FFO adjusted net leverage of 1.9 times at the end of 2017.

The firm’s current low financial leverage and Fitch’s expectation of continued strong operating cash flow will provide a cushion for the investment plan of 180-190 billion baht over the next three years, mainly for the Long Son Petrochemicals (LSP) project in Vietnam. In the absence of high capex, leverage should remain strong at about 2 times.

SCG’s 2017 revenue contribution from CBM operations in Asean increased to about 21% of total revenue from the CBM business, up from 14% in 2014. Fitch expects the contribution to be in the range of 25-30% over the medium term.

The expansion in the CBM business in Asean was completed by the first quarter of 2017, resulting in total cement capacity outside Thailand of 10.5 million tonnes a year, or 31% of current total capacity. But Fitch also expects fiercer competition in Asean countries, due to planned additional supply coming on stream, which will put pressure on profit margins over the next few years.

SCG’s ratings are also supported by the diverse sources of revenue from core businesses — CBM, chemicals and packaging — which have helped smooth operating cash flow and mitigate some sector-specific risks.

Strong cement demand in the domestic market compensated for the previous trough in petrochemicals during 201112, and the upturn in chemicals over the past three years has more than offset weak domestic demand for cement.

Fitch expects SCG’s capex and investment cost to increase to 50-70 billion baht a year over the next three years, from below 40 billion baht during 2016-17.

Capex for the CBM and packaging businesses should drop, but capex for the chemicals business is to surge once the LSP project starts in 2018 and consumes capex up to 2022, Fitch said.