FITCH affirms Siam City Cement at A(tha); outlook stable

FITCH affirms Siam City Cement at A(tha); outlook stable
Published: 26 July 2011

Fitch Ratings (Thailand) has affirmed Siam City Cement Public Company Limited’s (SCCC) National ratings at Long-Term ’A(tha)’ and Short-Term ’F1(tha)’. The Outlook is Stable. At the same time, Fitch has affirmed SCCC’s senior unsecured debentures at ’A(tha)’.

SCCC’s ratings continue to reflect its leading position as the second-largest cement producer in Thailand with strong brands in cement, ready mixed concrete and wood replacement products, as well as its stable domestic market share of about 27% in the past 10 years. Moreover, one of majority shareholders, Holcim Ltd.’s (Holcim; ’BBB’/Stable) operational support and strong marketing network in the global market also help strengthen the company’s exports.

The Stable Outlook reflects Fitch’s expectation that SCCC’s business and financial profiles will remain consistent with the current ratings over the next 24 months. Although SCCC’s capex is likely to increase in 2011-2013 from expansion, its net adjusted debt to EBITDAR is likely to remain below 2.0x, due to its currently low leverage and strong cash flow from operations.

Fitch expects increasing energy prices to depress the company’s profitability in the medium-term as energy costs account for a large portion of the cost of good sold. However, SCCC’s ability to partly pass on rising costs, its increasing usage of alternative fuel and electricity cost saving from waste heat generators should all help to reduce the pressure on the company’s operating margin.

SCCC’s ratings are constrained by large excess cement capacity in Thailand and the resultant occasional price competition that could undermine the company’s profit margin. The ratings are also constrained by its concentration to a single market, exposure to cyclical end-market demand, foreign exchange risk and high historical dividend payout that could drain out cash flow.

The ratings may be negatively affected by significant deterioration in credit metrics with net adjusted debt to EBITDAR higher than 2.0x or by a sharp decline in operating profits for a prolonged period. Positive rating action is not likely in the medium-term. A significant increase in operating scale and geographical diversification, along with sustained low financial leverage and no material deterioration in its business profile are important attributes for Fitch to consider any positive rating action. A significant increase in Holcim’s stake and explicit financial support could also positively affect the ratings.