Fitch affirms Siam Cement at 'A(tha)', Outlook Stable

Fitch Ratings (Thailand) Ltd has affirmed The Siam Cement Public Co Ltd's (SCC) National Long-Term Rating at 'A(tha)', National Short-Term Rating at 'F1(tha)' and its senior unsecured debentures at 'A(tha)' with a 'Stable' outlook.

Fitch notes that SCC's strong operating cash flow led to an improvement in credit metrics in 2015. EBITDA increased to above THB70bn (US$1.98bn) which saw FFO (Funds From Operations) net-adjusted leverage reduce to 2.5x. "Whilst this is below the positive rating guidelines in terms of leverage, SCC's ability to sustain this will be a challenge. The company's expansion strategies will push leverage up slightly in 2016-2017 against the backdrop of a weak outlook on SCC's cement and building materials (CBM) business in 2016, due to a slower-than-expected recovery of construction activities in Thailand," the rating's agency writes.

Additionally, the cash flow contribution from regional operations should remain small in 2016 given more intense competition in the Indonesian cement market, it adds. Fitch expects SCC's Cement and Building Materials (CBM) division performance to improve in 2017 which should be SCC's key growth driver over the medium term.

Key ratings drivers

Improved financial profile
In 2015 high product-to-feed margins of its chemicals business led to a higher EBITDA margin and financial leverage also significantly improved. Fitch Ratings expects these to remain healthy over 2016-17. A strong polyethylene spread should continue to support SCC's performance in 2016, while a recovery in domestic demand for cement and building materials products and a ramp-up of SCC's new regional cement capacities should be a key growth driver in 2017.

Fitch expects SCC's EBITDA margin to remain above 15 per cent in 2016-17 from 11 per cent in 2014 while keeping its FFO net adjusted leverage below 3x (2.8x-4.0x in 2011-14). The improved leverage should provide more headroom for the company to pursue its regional expansion strategies.

Business diversification
The ratings are supported by well-diversified sources of revenue in its core businesses – CBM, chemicals and packaging. There were track records of the diversification benefits in smoothing out cash flow over the past five years, eg when CBM growth reduced the pressure from a chemicals trough in 2012 or chemicals helped boost overall EBITDA from a weak CBM performance in 2015. The continued focus on regional expansion should further benefit SCC's business profile over the long term.

Market leader
SCC, as one of Thailand's largest conglomerates, holds the largest capacity and market share of cement, ceramic tiles, downstream chemicals and packaging paper in Thailand and some southeast Asian countries. Fitch expects SCC to maintain its leading market positions in each of its core businesses over the next five years.

High capex remains
To pursue its regional expansion strategies mainly in southeast Asia, Fitch expects SCC to keep its capex high at about THB50bn-60bn per year over 2016-17, despite the delayed investment of its largest petrochemical complex in Vietnam.

Cyclicality hinders ratings
The ratings also factor in SCC's inherent exposure to the cyclicality of the chemicals and packaging businesses, and a lack of pricing power due to the bulk of its products being commodities.