Fitch Ratings has affirmed
The Outlook remains Negative.
SCGP is rated at the same level as its stronger parent,
SCGP's Standalone Credit Profile (SCP) of 'a(tha)' reflects the company's solid business profile as the leading producer of paper-based packaging in south-east
Key Rating Drivers
Parent's Deleveraging May Be Challenging: Fitch expects SCC's EBITDA net leverage to stay at 4.5x-5.0x in 2022-2023 (
Parent-Subsidiary Linkage: Fitch has assessed that SCC, which owns 72% of SCGP, has a 'Weak' legal incentive, and 'Medium' strategic and operational incentives to provide support to the subsidiary. This results in up to two notches of rating uplift from SCGP's SCP. However, SCGP's SCP is only one notch below the parent's consolidated profile, which leads to the equalisation of its rating with the consolidated profile of its parent, in accordance with Fitch's criteria.
'Medium' Strategic Support Incentive: SCC's strategic incentive to support SCGP is driven by the subsidiary's somewhat large 30% contribution to the parent's consolidated EBITDA, as one of the group's three core business segments. SCGP also provides diversification benefits to its parent, whose other core businesses are in the more volatile petrochemical, and cement and building-material segments.
'Medium' Operational Incentive: Fitch's assessment of the operational incentive for the parent to support SCGP takes into consideration the 'High' management and brand overlap and 'Weak' operational synergies. SCGP's strategic and management decisions are integrated with those of SCC, with full branding of the subsidiary's products with its parent's brand. We believe operational synergies are 'Weak', as SCC and SCGP operate across independent value chains, making avoidance costs of SCGP's operations to the parent immaterial.
Resilient EBITDA Growth: Fitch estimates SCGP's EBITDA rose by about 2% in 2022 (2021: +16%), supported by capacity expansion and earnings recognition from recently acquired businesses. However, the ramp-up of new capacity under its packaging paper division and rising raw-material costs squeezed its EBITDA margin to about 13% (2021: 15.2%). Fitch expects EBITDA to continue to rise at about 10%-15% in 2023-2024, driven by organic growth and business acquisitions, while the margin should recover as SCGP is able to raise selling prices and amid easing raw-material costs.
Solid Financial Profile: Fitch believes SCGP is likely to maintain its EBITDA net leverage at below 2.5x, even though the company will continue to pursue its growth strategy over the next two to three years. The key strategic focus for its growth strategy is to expand its downstream packaging business in south-east
Leading Regional Paper-Packaging Producer: SCGP's SCP reflects its leadership as south-east
Defensive End Markets: Around 70% of SCGP's packaging revenue is from consumer-linked end-markets, which have defensive demand across economic cycles or are in a fast growth stage. SCGP's business is also supported by its vertical integration into containerboard, providing some margin protection against higher raw-material costs. We expect SCGP to broaden its capacity and product diversity over the medium term, which would boost customer demand.
Derivation Summary
SCGP's SCP is comparable with that of
SCGP is much larger than
Key Assumptions
Revenue to increase by around 8% in 2023 (2022: 18%), supported by improved demand and capacity expansion
EBITDA margin to improve to around 14%-15% in 2023-2024 (2022: 13.2%) as inflationary pressure decreases
Capex and investment plans of around
Dividend payout ratio of around 40% in 2023-2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook could be revised to Stable if the Outlook on SCC's National Long-Term Rating is revised to Stable, provided linkages remain intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of SCC's National Long-Term Rating.
Any significant weakening of linkages with the parent.
For SCGP's SCP:
Factors that may, individually or collectively, lead to positive action:
A significant improvement in SCGP's business profile and operating scale, which would be reflected in an increase in EBITDA as well as geographical and product diversification.
Factors that may, individually or collectively, lead to negative action:
EBITDA net leverage above 3.5x for a sustained period.
For the ratings on SCC, the following sensitivities were outlined by Fitch in its
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The rating Outlook could be revised to Stable if SCC is on-track to reduce EBITDA net leverage to 3.5x by 2024, and lower thereafter.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to meet the positive rating sensitivity.
Liquidity and Debt Structure
Sufficient Liquidity: SCGP had
Issuer Profile
SCGP is the key packaging arm of SCC, one of
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
SCGP's ratings are linked to SCC's ratings.
RATING ACTIONS
Entity / Debt
Rating
Prior
Natl LT
A+(tha)
Affirmed
A+(tha)
senior unsecured
Natl LT
A+(tha)
Affirmed
A+(tha)
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