M&A Remains A Key Risk for PTTGC's Deleveraging

Fitch expects PTTGC's FFO net leverage to increase to around 3.8x at the closing of the Allnex acquisition in 4Q21 from 1.2x at end-2Q21. PTTGC's leverage is likely to decrease to below Fitch's downgrade trigger of 2.5x by 2023, as we expect PTTGC to apply FCF of THB18 billion-THB19 billion a year for debt repayment during the period.

However, the Negative Outlook on PTTGC reflects the risk that deleveraging could be delayed by a further large debt-funded acquisition. PTTGC's M&A appetite has increased over the past few years, to support its target to increase the earnings contribution from high-value products and the specialty chemical business. The credit profile could weaken if the company deploys cash towards large M&A before building up enough headroom to do so.

PTTGC reported a strong earnings rebound in 2H20 and 1H21 on the strong recovery in the petrochemical business. Fitch expects PTTGC's EBITDA to improve significantly to around THB50 billion in 2021, from THB16.3 billion in 2020. While the improved performance is positive, we believe Covid-19 pandemic-related challenges may continue. In addition, petrochemical spreads are likely to moderate in 2H21 and 2022 due to new petrochemical supply.

The report, "What Investors Want to Know: PTTGC", answers some questions from investors following the Allnex acquisition announcement in July 2021.

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