Tris downgrades UMI to BB

Tris Rating has downgraded the company rating of Union Mosaic Industry (UMI) to BB from BB+, with a stable outlook.

The rating downgrade reflects UMI’s weaker-than-expected performance and a significant deterioration in its financial profile.

The rating continues to reflect UMI’s adequate competitive advantage in the tile market. But the rating is weighed down by prolonged weakness in domestic demand and intensified competition from imported tiles. The rating also takes into account rising energy costs, heightening liquidity risk and refinancing risk.

UMI’s adequate competitive strength is underpinned by its modest market share, well-accepted brand names and long track record of operation.

UMI’s products have been distributed in Thailand for over 30 years. The company has a 11%-13% market share by sales.

Tris views UMI’s business profile as having weakened, due to contracting sales and reduced capacity. UMI is intent on paring down capacity and operations in a bid to boost production efficiency and cut costs.

UMI’s operating results continued to suffer from the prolonged downturn in the building material industry. Domestic demand for tiles has continued to tumble over the past several years, due in large part to sluggishness in the residential property sector.

Domestic manufacturers continue to struggle with fierce price competition from imported tiles. Large tile producers have expanded into neighbouring countries, despite relatively lower profit margins, to maintain production.

The industry downtrend has prompted tile producers to implement cost-cutting measures to alleviate depressive impact. The down cycle also led to mergers among tile producers. In Tris’s view, the prospects for recovery of the tile market remains bleak over the next two or three years.

WEAK PERFORMANCE

The rating downgrade is built on UMI’s weaker-than-expected operating performance. UMI’s sales plunged by 11% in 2017 to 2.5 billion baht, down from 2.8 billion baht in 2016.

The company continued to underperform in the first half of 2018. Sales fell further, by 8.8% year-on-year. The operating margin (operating income before depreciation and amortisation as a percentage of sales) fell to 7.7% in 2017 and 5.5% in the first half of 2018.

Cash-flow protection worsened as the ratio of funds from operations to total debt fell to 11.7% in 2017 and 8.2% in the first half of 2018, far below the range of 15%-21% in Tris’s previous forecast.

UMI’s sales volume of main products has declined steadily, reflecting its weakened market position. The company remains focused on the medium- to high-end segments, which should have stronger demand and affordability than the lower-end segment — but these target markets are smaller.

Moreover, imported tiles, particularly from China, have increasingly penetrated the highend segment, with a wide range of products. This is also a major hindrance to UMI’s effort to recover sales volume.

Tris expects UMI’s profit margin to narrow down. In the base case, Tris forecasts sales to range between 2.3 billion and 2.4 billion baht during 2018-20. Profit will suffer due to the escalating price of natural gas, a main energy source for tile production. Natural gas generally comprises 20-25% of total cost. The price of gas is contractually set to follow the price of fuel oil with a lag of three to four months.

As the oil price increased by about 25% year-on-year in the first half of 2018, Tris believes that UMI’s profitability in the second half of 2018 will contract further. Tris forecasts the operating margin to decline and stay below 6%, compared with the peak of 11.1% in 2016.

Tris assesses that UMI’s liquidity, on a consolidated basis, is inadequate, underpinned by waning cash flows and large bond maturity. In Tris’s projection, earnings before interest, tax, depreciation and amortisation (ebitda) interest coverage ratio could decline to below 3 times, while the ratio of funds from operations to total debt could fall below 10%.

UMI has a bond worth about 450 million baht due in July 2019. The company plans to make some prepayments and refinance the remainder to manage refinancing risk. In Tris’s opinion, UMI’s weakened financial profile could raise the challenges for the company to access financial markets, thus exposing the company to rising refinancing risk.

Tris also incorporates the debt trouble of T.T. Ceramic Plc (TTC) as a sign of inadequate liquidity. TTC, a main subsidiary of UMI, had about 741 million baht in restructured debt (59.5% of consolidated outstanding debt) as of June 2018.

During the second quarter of 2018, TTC requested its lenders to relax on interest payments and principal payments. Tris sees a more extensive debt restructuring for TTC as likely.