Fitch Assigns 'A+(tha)' Rating to SCG Packaging's Proposed THB40 Billion MTN Programme

Monday 23 May 2022 16:15
Fitch Ratings has assigned a senior unsecured rating of 'A+(tha)' to SCG Packaging Public Company Limited's (SCGP; A+(tha)/Stable) proposed THB40 billion medium-term note programme (MTN). The programme, which allows for the issuance of senior unsecured baht notes, is rated at the same level as SCGP's senior unsecured debt as they will constitute the direct, unconditional, unsubordinated and unsecured obligations of SCGP.

SCGP's ratings are equalised with that of its stronger parent, The Siam Cement Public Company Limited (SCC, A+(tha)/Stable), under Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria.

PSL Consideration: Fitch has assessed that SCC, which owns 72% of SCGP, has 'Weak' legal incentive, and 'Medium' strategic and operational incentives to provide support to the subsidiary, which could result in up to two notches of rating uplift from SCGP's Standalone Credit Profile (SCP) of 'a(tha)'. 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.

SCGP's 'a(tha)' SCP reflects the company's solid business profile as the leading producer of paper-based packaging in the ASEAN region with stable cash flows and low leverage.

'Medium' Strategic Support Incentive: SCC's strategic incentive to support SCGP is driven by the subsidiary's roughly 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 the more volatile petrochemical, and cement and building-material segments.

'Medium' Operational Incentive: Fitch's assessment of the operational incentive considers the 'High' management and brand overlap between SCC and SCGP, and 'Weak' operational synergies. SCGP's strategic and management decisions are integrated with SCC's, with full branding of the subsidiaries' products with the parent's SCG brand. We believe they have 'Weak' operational synergies as SCC and SCGP operate across independent value chains, which means the avoidance costs of SCGP's operations to the parent are immaterial.

Healthy EBITDA Growth: Fitch estimates SCGP's EBITDA will increase by 8% in 2022 after rising by 23% to THB20 billion in 2021, supported by capacity expansion and earnings recognition from recently acquired businesses. A series of acquisitions since 2020 may raise SCGP's revenue above THB140 billion by end-2022, from THB92 billion in 2020. However, the ramping up of new capacity under its packaging paper division and increasing raw-material cost could moderate its EBITDA margin in 2022.

SCGP's EBITDA fell by 9% yoy to THB4.7 billion in 1Q22. The EBITDA margin narrowed to around 13% in 1Q22 from a high base of around 19% in 1Q21, despite strong revenue growth of 34%. The margin was affected by inflationary pressure on raw materials, energy and logistic costs, as well as China's lockdowns, which weakened demand and disrupted the supply chain. However, Fitch expects a wider EBITDA margin of around 15% by end-2022, reflecting a demand recovery and increasing average selling prices.

Financial Profile Remains Solid: SCGP's funds from operations (FFO) net leverage is likely to remain at around 2.0x by end-2022 (last 12 months to 1Q22: 2.1x, 2020: 0.7x), driven by high capex and investments of around THB20 billion a year. The company plans to use part of the IPO proceeds of THB40 billion in 2020 for opportunistic acquisitions to pursue its growth strategy over the next few years. The key strategic focus is to expand its downstream packaging business in ASEAN, and extend its products and services to fibre-based and polymer packaging solutions.

Leading ASEAN Paper-Packaging Producer: SCGP's 'a(tha)' SCP reflects its leadership as the largest packaging-paper and corrugated-container producer in ASEAN. Its total fibre-based packaging capacity for upstream packaging paper and downstream packaging will rise to 6.0 million tonnes per annum (mtpa) in 2022 and 6.3 mtpa in 2024 from around 5.7 mtpa in 2021 from greenfield expansion in the Philippines and northern Vietnam. The capacity of its food-grade and polymer packaging has risen materially from a low base after the acquisitions since 2020.

Defensive Cash Flows: Around 70% of SCGP's packaging revenue is from consumer-linked end-markets, such as food and beverage, fast-moving consumer goods and e-commerce, 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 raw-material cost increases. We expect SCGP to improve its capacity and product diversity over the medium term, which would boost its demand from customers.

SCGP's SCP is comparable with Siam City Cement Public Company Limited's (SCCC, A(tha)/Stable) rating, as they both benefit from strong market positions in their sectors. SCCC is the second-largest cement producer in Thailand, but its cash flow is more susceptible to economic downturns compared with that of SCGP 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 its end-customers, support higher leverage than SCCC for the same rating.

Fitch's Key Assumptions Within Our Rating Case for the Issuer

  • Revenue to increase by 17% in 2022 (2021: 34%), supported by demand improvement, capacity expansion and consolidation of recent acquisitions;
  • EBITDA margin to narrow to around 15% in 2022-2023 (2021: 16.1%, 2020: 17.5%);
  • Capex and investment plan of around THB30 billion over 2022-2023;
  • Dividend payout ratio of around 40% in 2022-2023

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • An upgrade in the parent's National Long-Term Rating together with an upward revision in SCGP's SCP, provided the linkages between SCC and SCGP 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.


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:

  • FFO net leverage above 3.5x for a sustained period.

For SCC's ratings, the following sensitivities were outlined by Fitch in a rating action commentary published 24 January 2022:

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • We do not expect positive rating action unless there is a significant profit contribution from the overseas expansion of its chemicals business; for instance, from the full operation of the Long Son Petrochemicals project.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • FFO net leverage above 3.5x for a sustained period.

Sufficient Liquidity: SCGP had THB23 billion in debt maturing within the next 12 months as of end-March 2022, including working-capital facilities from banks of around THB21 billion and current maturities of term loans of around THB2 billion. Its liquidity is supported by cash on hand of about THB11 billion as of end-March 2022, cash flow from operations of about THB13 billion a year and strong refinancing ability through the local debt-capital market and bank funding.

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 ASEAN.

21 January 2022

The principal sources of information used in the analysis are described in the Applicable Criteria.

SCGP's rating is linked to SCC's rating.

Additional information is available on

Source: Fitch Ratings