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Fitch Affirms and Withdraws SVI's Ratings
May 12, 2017 / 6:28 AM / 2 months ago

Fitch Affirms and Withdraws SVI's Ratings

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(The following statement was released by the rating agency) BANGKOK, May 12 (Fitch) Fitch Ratings (Thailand) Limited has affirmed SVI Public Company Limited's (SVI) National Long-Term Rating at 'BBB+(tha)' with Stable Outlook and its National Short-Term Rating at 'F2(tha)'. The agency has simultaneously withdrawn the ratings on SVI for commercial reasons. KEY RATING DRIVERS Continued Business Recovery: SVI's operations have rebounded strongly after a fire at its plant in late 2014. The company restored production to pre-fire levels in 2016. Excluding the recently acquired European operations, SVI's revenue in 2016 increased to its pre-fire level of THB8.6 billion. We believe the company will be able to maintain its business and financial profile commensurate with the current rating over the medium term. Acquisition Aids Diversification: Fitch expects the 2016 acquisition of Seidel Electronics Group Company (Seidel), an electronics manufacturing service (EMS) provider with plants in Austria, Slovakia and Hungary, to help the company to expand into new high-margin segments, such as automotive, transportation and medical, where Seidel is focused. This acquisition will also reduce the reliance on Scandinavian customers by adding new European customers. In 2016, the proportion of Scandinavian customers reduced to 52% of revenue from 71% in 2015. Margin to Improve: Fitch expects SVI's operating EBITDAR margin to rebound to around 7% in 2017 and 2018 from 6.4% in 2016. We expect the restructuring of Seidel's manufacturing process and the streamlining of materials acquisition to help improve its cost structure and profit margin in the medium term. In 2016, the consolidation of Seidel lowered SVI's operating EBITDAR margin as Seidel's profit margin is lower than that of SVI due to higher overhead costs. Healthy Financial Profile: Fitch expects SVI to maintain its FFO-adjusted net leverage below 1.0x over the next two years. FFO of THB700 million-900 million a year should be enough to support planned annual capex of THB400 million-600 million and dividends in 2017 and 2018. SVI had net cash of THB3.2 billion at the end of 2016. EMS Growth Opportunity: SVI continues to benefit from stability in the EMS market, which is driven by industrial demand. In addition, manufacturers increasingly rely on EMS providers in their overall supply chain, in particular outside the consumer electronics sector. The company's strategy to focus on the growing non-traditional end-market segment, which is less volatile and offers higher margins, has helped sustain SVI's operations and business profile amid a challenging operating environment over the past several years. Small Size, Concentration Risk: SVI's ratings are constrained by its narrow geographic coverage, its concentrated customer base, the likelihood of greater competition in the non-traditional EMS market, and technology risks associated with the electronics segment. Other constraints include its volatile working-capital requirement and exposure to foreign-exchange risk. However, this is partly offset by the purchase of forward contracts. DERIVATION SUMMARY SVI's business profile is supported by its focus on the growing and less volatile non-traditional end-product segment, which offers wider margin than the traditional EMS segment. Nevertheless, the sector's risk profile is above average. SVI operates in the EMS industry with a risk profile similar to that of KCE Electronics Public Company Limited (KCE, A-(tha)/Stable). Both focus on niche segments of their respective industries. They benefit from the lower competition and demand volatility, which help stabilise their revenue and earnings. However, SVI has a narrower profit margin than KCE and is smaller by both revenue and operating EBITDAR. These aspects warrant a rating one notch lower than that of KCE. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 10%-15% in 2017 and 2018 - EBITDAR margin improves to around 7% in 2017 and 2018 (2016: 6.4%) - Capex of THB600 million in 2017 and THB400 million in 2018 - 40% dividend payout ratio RATING SENSITIVITIES Rating sensitivities are no longer relevant given today's rating withdrawals. LIQUIDITY Strong Liquidity: Fitch expects SVI's cash flow from operations to be enough to support capex and dividends in the medium term. SVI has consistently maintained a high cash balance (end-2016: THB3.9 billion), which has provided the company a large buffer against downside risks from the industry downturn and manufacturing disruptions over the past several years. The company has minimal debt maturing over the next 12 months of THB103 million at end-2016. FULL LIST OF RATING ACTIONS SVI Public Company Limited Fitch has affirmed and withdrawn the following ratings: --National Long-Term Rating at 'BBB+(tha)'; Outlook Stable --National Short-Term Rating at 'F2(tha)' Contact: Primary Analyst Obboon Thirachit Director +662 108 0159 Fitch Ratings (Thailand) Limited Level 17, Park Ventures 57 Wireless Road, Lumpini, Patumwan Bangkok 10330 Secondary Analyst Nichaya Seamanontaprinya Associate Director +662 108 0161 Committee Chairperson Steve Durose Managing Director +612 8256 0307 Summary of Financial Statement Adjustments - Fitch adjusts revenue to exclude insurance claims arising from the fire at the facility. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(tha)' for National ratings in Thailand. Specific letter grades are not therefore internationally comparable. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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