Fitch Ratings has affirmed SCG Packaging Public Company Limited's (SCGP) National Long-Term Rating and the senior unsecured ratings of SCGP's THB40 billion medium-term note programme at 'A+(tha)'.

The Outlook remains Negative.

SCGP is rated at the same level as its stronger parent, The Siam Cement Public Company Limited (SCC, A+(tha)/Negative) under Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria. The Negative Outlook mirrors the Negative Outlook of SCGP's parent and reflects the risks associated with the parent's deleveraging over the next 12-18 months.

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 Asia, with stable cash flow and low leverage.

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 (end-September 2022: 4.7x), due to weak earnings from its chemical business. The start-up of the Long Son Petrochemicals (LSP) project in Vietnam in mid-2023 and expected recovery in petrochemical spreads in 2024 should increase SCC's operating cash flow significantly. Weaker-than-expected business recovery and earnings contribution from LSP, as well as higher-than-expected capex without a corresponding equity injection, could lead to negative rating action.

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 Asia and extend its products and services to fibre-based and polymer packaging solutions. We estimate SCGP's EBITDA net leverage remained flat at about 1.9x in 2022 (2021: 1.9x).

Leading Regional Paper-Packaging Producer: SCGP's SCP reflects its leadership as south-east Asia's largest packaging paper and corrugated container producer. Fitch estimates that its total fibre-based packaging capacity for upstream packaging paper and downstream packaging reached 6.0 million tonnes per annum (mtpa) in 2022 and will increase to 6.3 mtpa in 2024, from 5.7 mtpa in 2021. The capacity of its food-grade and polymer packaging has risen significantly from a low base due to acquisitions since 2020.

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 Siam City Cement Public Company Limited's (SCCC, A(tha)/Stable), as both companies benefit from strong market positions in their sectors. SCCC is Thailand's second-largest cement producer, but its cash flow is more susceptible to economic downturns because of exposure to construction and real estate end-markets. SCGP is also more diversified geographically and across end-markets, which, together with more defensive demand from end-customers, supports higher leverage than that of SCCC for the same rating.

SCGP is much larger than Polyplex (Thailand) Public Company Limited (PTL, A-(tha)/Stable), a leading manufacturer of polyethylene terephthalate film, in terms of revenue and EBITDA. PTL's geographical diversification is better, but is offset by SCGP's leading position in the paper-based packaging business in south-east Asia. SCGP has slightly higher financial leverage, but its stronger business profile results in a one-notch higher rating.

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 THB15 billion for 2023 and THB6 billion in 2024

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 1 February 2023 rating action commentary:

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 THB23 billion in debt maturing within the next 12 months at end-September 2022, including working-capital facilities from banks of around THB21 billion and current maturities of term loans of around THB2 billion. Liquidity was supported by cash on hand of about THB10 billion as of end-September 2022, cash flow from operations of about THB15 billion a year, and strong refinancing ability through the local debt capital markets and bank funding.

Issuer Profile

SCGP is the key packaging arm of SCC, one of Thailand's largest industrial conglomerates. The company, which is listed on the Stock Exchange of Thailand, is a leading producer of paper-based packaging in south-east Asia.

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

SCG Packaging Public Company Limited

Natl LT

A+(tha)

Affirmed

A+(tha)

senior unsecured

Natl LT

A+(tha)

Affirmed

A+(tha)

Page

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