Credit Opinion: Turkiye Sise ve Cam Fabrikalari A.S.
Global Credit Research - 11 May 2015
Turkey
Ratings
Category
Outlook
Corporate Family Rating
Senior Unsecured -Dom Curr
Moody's Rating
Stable
Ba1
Ba1/LGD4
Contacts
Analyst
Phone
Stanislas Duquesnoy/Frankfurt am 49.69.707.30.700
Main
Rehan Akbar/DIFC - Dubai
9714.237.9565
Martin Kohlhase/DIFC - Dubai
971.42.37.9536
David G. Staples/DIFC - Dubai
Key Indicators
[1]Turkiye Sise ve Cam Fabrikalari A.S.
Revenue (USD Billion)
EBITA (USD Million)
EBITA Margin
EBITA / Interest Expense
Debt / EBITDA
Retained Cash Flow / Net Debt
Free Cash Flow / Debt
ROAA (EBITA / Avg. Assets)
Debt / Book Capitalization
FFO / Debt
31/12/2014
$3.1
$280.6
8.9%
2.6x
3.2x
71.5%
-9.0%
5.2%
36.1%
25.2%
31/12/2013
$3.1
$267.9
8.5%
2.8x
3.5x
36.2%
-29.4%
5.0%
36.6%
20.0%
31/12/2012
$3.0
$283.6
9.6%
4.0x
2.3x
64.0%
-11.2%
6.0%
29.5%
35.0%
31/12/2011
$3.0
$567.0
19.0%
9.3x
1.7x
122.1%
-6.1%
12.6%
32.0%
44.8%
31/12/2010
$2.8
$427.9
15.3%
6.2x
1.9x
94.7%
7.3%
9.6%
33.7%
30.9%
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. Source: Moody's Financial Metrics
Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.
Opinion
Rating Drivers
- Leading domestic market position in Turkey across all business segments
- Balanced product mix diversifies revenue base and mitigates single product line exposure
- Investment and execution risk related to growth plans in Turkey and other emerging markets
- Geographic concentration risk as half of all revenues are derived from the domestic Turkish market, and an
additional quarter is exported from the country
Corporate Profile
Founded in 1935, Turkiye Sise ve Cam Fabrikalari A.S. ("Sisecam") is a Turkish industrial manufacturer of glass
products as well as soda ash and chromium-based chemicals. Sisecam has four business segments operating
through its core subsidiaries, namely Trakya Cam Sanayii A.S. (flat glass), Pasabahce Cam Sanayii ve Tic A.S.
(glassware), Anadolu Cam Sanayii A.S. (glass packaging) and Soda Sanayii A.S. (chemicals). Over the past
decade, the group has been increasing its geographical footprint in Eastern Europe and CIS as part of its growth
strategy. Sisecam is 72% owned by Turkiye Is Bankasi A.S., with an additional 28% listed on Borsa Istanbul.
As of calendar year-end 2014, Sisecam reported consolidated revenues of TRY6.88 billion and an operating profit
of TRY653 million with sales from its international manufacturing facilities constituting about a quarter of total
revenues.
SUMMARY RATING RATIONALE
The Ba1 stable Corporate Family Rating (CFR) reflects Sisecam's leading market position in Turkey and the
group's healthy financial profile as well as the execution risks associated with its growth ambitions in emerging
markets. Sisecam has a balanced revenue and product mix derived from its flat glass, glassware, glass
packaging and chemicals businesses. However, the company has geographic concentration risk with
approximately half of all revenues originating from the Turkish market as well as exposure to emerging markets
through investments in countries such as Russia. In determining Sisecam's ratings, we have applied our Global
Manufacturing Companies industry methodology published in July 2014.
DETAILED RATING CONSIDERATIONS
ESTABLISHED FOOTHOLD IN TURKEY WITH LEADING MARKET POSITION AND HEALTHY FINANCIAL
PROFILE UNDERPINS RATINGS
Sisecam's ratings reflect the competitive advantages of being the market leader in Turkey across its core product
lines. The group benefits from a diversified revenue base through sales of products such as architectural glass,
automotive glass, food and beverage glass packaging, retail and corporate glassware, and soda ash and
chromium-based chemicals. The individual products have different demand drivers and varying sensitivities to the
economic cycle, with the glass packaging and chemicals segment historically being relatively stable and resilient
to economic weakness, while flat glass and glassware are more cyclical in nature (Baa for Business Profile subfactor).
The rating also incorporates the group's healthy financial profile, including the prudent liquidity management
undertaken during 2008-10 when economic uncertainty was high (Baa for Financial Policy sub-factor). We
anticipate that Sisecam's established manufacturing base will benefit from medium to long term economic growth
in Turkey and Europe, although the current heightened country risk in some of its core countries of operation
creates uncertainty while growth in Europe remains sluggish.
As of FYE 2014, Sisecam had modest leverage of 3.2x (Baa for Debt/EBITDA sub-factor) while retained cash flow
(RCF) to net debt was strong at 71.5% (Aaa for RCF/Net Debt sub-factor) given substantial cash balances. The
company has historically maintained material cash on its balance sheet, averaging about TRY1.8 billion over the
past five years and peaking in FYE 2014 to TRY2.78 billion. In the absence of general purpose committed credit
lines which many Turkish corporates including Sisecam do not have, the high cash balances relative to global
peers helps to offset liquidity risk. In our view, the recent cash build up will also support the company's next phase
of investments and could be used for inorganic growth through prudent small to midsize acquisitions.
LARGE SCALE INVESTMENT PLANS HAVE POSITIVE LONG-TERM IMPLICATIONS BUT HAVE
ASSOCIATED INVESTMENT AND EXECUTION RISK
Under Sisecam's 2012-2014 growth strategy, the company spent TRY3.8 billion over three years to increase its
capacity and geographical footprint and invested in Turkey, Russia, Bulgaria, Romania and Georgia as well as
made acquisitions in India, Germany, Slovakia and Hungary. The projects varied in size, location and business
line, which to some extent diversified investment risk compared with a single large-scale investment. In line with
the company's ambitions to become one of the top three players in the glass sector, we anticipate that the
company will begin another investment cycle in the near future.
We believe that Sisecam's growth ambitions has positive long-term implications but also has associated
investment and execution risks. Although a number of identified investments are brown-field projects in markets
where Sisecam has prior operational experience, many of the company's current and planned operations are
located in emerging markets where geopolitical risks are compounded by low predictability of regulations and
policies. The challenging operating environment in Russia and Ukraine is one such example to which the glass
packaging business is particularly exposed to (five plants in Russia and one in Ukraine).
Other potential event risks, such as an increase in industry taxes or introduction of specific legislations can also
increase the cost of doing business or affect overall product demand. For instance, Russia in recent years has
introduced several legislations that have put pressure on alcohol consumption and which in turn has negatively
affected the glass packaging business. In addition, planned capacity increases can lead to potential overcapacity
in some of the markets in which Sisecam operates, with the risk of weaker-than-projected revenue growth and
lower investment returns.
POTENTIAL PRESSURE ON MARGINS FROM EXPOSURE TO FUTURE ENERGY COST INCREASES
Over the 2003-2011 period, Sisecam's reported EBITDA margin remained comfortably above the 20% level but
was breached in 2009 when the glass industry was negatively affected by the global economic downturn. Between
October 2011 and October 2012, Sisecam faced an effective energy cost increase of about 50% in Turkey with
consolidated group margin falling to 19.1% in 2012. Margins have remained close to 20% since then as Sisecam
over time adjusted for the higher energy prices by partially passing costs to customers, particularly for products
where the company is the price setter (due to its dominant market share) or where it is cost prohibitive to transport
the product over long distances (such as flat glass).
Effective October 2014, the Government of Turkey increased gas prices by an additional 9% to reflect the
increased import cost of gas as a result of the Lira depreciation. We incorporate the risk of further moderate price
hikes into our analysis as the price of natural gas in Turkey is one of the lowest in Europe and the currency has
weakened further since October 2014, though the timing and magnitude of this price adjustment is uncertain.
It also remains uncertain as to what extent Sisecam can revise product prices to reflect an increasing cost base.
In addition, broader industry dynamics can influence pricing decisions and the threat of substitution can increase if
product prices are uncompetitive, for instance, the use of plastic and aluminum packaging as a substitute to glass
containers. We nevertheless note that the company is proactive in protecting its profitability, as can be seen when
it increased the price of its basic glass and coated glass product lines by 4% in early October 2014 to compensate
for the gas price hike. One of Sisecam's strategic initiatives is also to improve operational efficiencies that can
offset some of the profitability pressure, with reducing energy costs being an important element.
GEOGRAPHIC CONCENTRATION RISK IN TURKEY AND INTERNATIONAL SALES EXPOSURE TO
EUROPE
Sisecam's rating takes into consideration its scale (Ba for Revenue sub-factor) and geographic footprint of its
operations, with approximately half of all revenues derived from Turkey and another quarter exported from the
country. The different business segments have high exposure to a combination of the domestic market, Europe
and CIS. Turkish economic growth has been lower than expected, with real GDP growth of 2.9% in 2014 versus
4.2% in 2013 while Moody's has revised downward its growth forecasts for 2015 and 2016 to 2.5% and 2.9%
respectively. A sustained macroeconomic environment deterioration would lead to a more challenging business
and operating environment for Sisecam, particularly in the flat glass and glassware segments.
Currency volatility continues to be a credit risk for Turkish corporates that have structural currency mismatches
between their financial assets and liabilities. Sisecam however, has demonstrated over the past several years its
ability to prudently manage FX risk in times of heightened volatility but nonetheless this poses an operational
challenge and increases the cost of servicing foreign currency debt (albeit mitigated by hard currency revenues).
Liquidity Profile
Sisecam has adequate liquidity with funds from operations (FFO) being sufficient to fund normal operating
requirements and maintenance capex that we assume to be around TRY500 million per year. We anticipate
Sisecam to be free cash flow neutral in 2015 before turning negative again during the 2016-17 period as it enters
into a new investment cycle. Expansionary capex during that period would require additional borrowings and
reduce cash balances. As of year-end 2014, the group had a substantial unrestricted cash balance amounting to
TRY2.78 billion. Although Sisecam does not have any committed liquidity facilities as a result of its strong banking
relationships, this is mitigated by the material unrestricted cash that the company maintains.
Sisecam does not have any secured debt in its capital structure with the group utilising long-term project loans in
combination with short-term working capital loans. Sisecam's debt maturity profile historically has remained
skewed towards the short-term as working capital loans got rolled over, but with the issuance of the $500 million 7year bond in May 2013, the maturity profile has improved with debt due within one year constituting a quarter of
total outstanding debt.
The company has a dividend distribution policy that allows 50% of distributable net profit to be paid out through a
combination of cash and bonus shares. Cash dividends for the past three years have been relatively low - around
17% of net income - and given the company's capex programme, we do not anticipate high cash payouts over the
next three years. Additionally, we expect that dividend payout will be reduced further, if required, to preserve
liquidity as was done in 2010-11.
Alternate sources of liquidity include Pasabahce's potential IPO. In October 2014, the group eliminated cross
ownership in the subsidiary as a first step by selling a 15.4% stake in Pasabahce to EBRD for EUR125 million
(TRY352 million). Although the IPO timing remains uncertain, the monetisation of this over time will support the
group's liquidity needs while the recent deal provides insight into the potential valuation of the subsidiary.
Rating Outlook
The stable outlook on the ratings incorporates our view that management will continue to strategically increase its
geographic footprint while maintaining debt to EBITDA in the 2.5x to 3.5x range. Over the long term, the identified
investments will increase the overall operational scale of the company as well as reduce geographic concentration
risk.
What Could Change the Rating - Up
Positive rating pressure could build if Sisecam is able to improve its profitability with EBITDA margin above 20%
and its cash flow coverage (as measured by free cash flow to debt) above 10% on a sustainable basis.
Additionally, an upgrade would also require Sisecam to diversify and strengthen its geographical footprint so as to
mitigate against event risks while maintaining debt to EBITDA below 2.5x.
What Could Change the Rating - Down
Conversely, Sisecam's rating could come under negative rating pressure if the group's liquidity deteriorates during
its investment phase. We could consider downgrading Sisecam if the group faces a structural decline in
profitability with EBITDA margin below 15% while debt to EBITDA rises above 3.5x.
Rating Factors
Turkiye Sise ve Cam Fabrikalari A.S.
Manufacturing Industry Grid
[1][2]
Factor 1 : Business Profile
(20%)
a) Business Profile
Current FY
12/31/2014
Measure
Score
of May 2015
Measure
Score
Baa
Baa
Baa
Baa
$3.1
Ba
$3.2 - $3.4
Ba
8.9%
Ba
9% - 11%
Baa
2.6x
3.2x
71.5%
Ba
Baa
Aaa
3x - 4x
2.8x - 3.2x
60% - 80%
Ba
Baa
Aaa
-9.0%
Ca
-10% - 0%
Caa
Baa
Baa
Baa
Baa
[3]Moody's 12-18 Month Forward ViewAs
Factor 2 : Scale (20%)
a) Revenue (USD Billion)
Factor 3 : Profitability (10%)
a) EBITA Margin
Factor 4 : Coverage and
Leverage (40%)
a) EBITA / Interest Expense
b) Debt / EBITDA
c) Retained Cash Flow / Net
Debt
d) Free Cash Flow / Debt
Factor 5 : Financial Policy (10%)
a) Financial Policy
Rating:
a) Indicated Rating from Grid
b) Actual Rating Assigned
Ba1
Ba1
Baa3
Ba1
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. [2] As of 12/31/2014; Source: Moody's Financial Metrics [3] This represents Moody's
forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions
and divestitures
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