Mar 17, 2011

Titan Kimia rating affirmed A+(id)

Fitch Ratings has affirmed Indonesia-based polyethylene producer PT Titan Petrokimia Nusantara's (TPN) national long-term rating at A+(idn) with stable outlook.
In a press statement today, at the same time, the agency has also affirmed TPN's Rp73 billion rupiah bond and Rp200 billion Islamic bond, both due in June 2015, at A+(idn).
Weak financial performance in 2010 has highlighted TPN's high business risk, leading Fitch to downgrade the company's standalone rating to BBB+(idn) from A-(idn).
However, the agency has reassessed the ties between TPN and its parent, Malaysia's Titan Chemicals Corp Sdn Bhd (Titan Chemicals), which has a 95.3% beneficial ownership in TPN.
Consequently, Fitch believes that parental support warrants a A+(idn) rating, reflecting a three-notch uplift above TPN's standalone rating, compared with two notches previously.
The rating reflects TPN's established position in Indonesia's polyethylene (PE) market with a 25% market share.
Fitch expects TPN to increase its market share by capitalizing on the demand growth potential as Indonesia remains a net importer of PE.
TPN's market position is underpinned by its cost competitiveness and short lead times compared with imported PE, although new low-cost production capacity in the Middle East could put some pressure on margins.
The rating is constrained by TPN's exposure to the cyclical petrochemical industry and the consequent volatility in margins and cash flow generation.
The rating is also constrained by TPN's lack of both product diversification and vertical integration. Nonetheless, this risk is partially mitigated by its operational links with Titan Chemicals, which provides up to 30% of TPN's ethylene requirements and acts as a purchasing agent for the remaining 70%.
TPN's operating EBITDAR margin fell sharply to 0.6% in FY10 (FY09: 13.5%) primarily due to higher ethylene prices and an unplanned plant shutdown. This caused debt/operating EBITDAR leverage to rise sharply to 23.9x (FYE09: 0.8x).
Nevertheless, Fitch expects TPN's profitability and leverage to gradually improve as demand for petrochemical products grows. This expectation is reflected in the stable outlook.
A negative rating action may result if net leverage is sustained above 3x and funds from operations (FFO) interest cover is sustained below 2x.
A sharp decline in market share and in the level of integration with Titan Chemicals may also result in downward rating pressure.
An upgrade in TPN's standalone rating is not likely unless there is a structural improvement in the company's business position. However, the rating may be upgraded if parental support strengthens.
TPN is one of the largest polyethylene producers in Indonesia with a total production capacity of 450 kilotonnes per annum. In 2010, TPN's revenue and operating EBITDAR were approximately US$410.7 million and US$2.4 million, respectively.

Disclosure: No position at the stock mentioned above.  

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