TRIS Rating Co., Ltd. has affirmed the company rating of Sri Trang Agro-Industry PLC (STA) at “BBB+” with “positive” outlook. The rating reflects the company’s leading market position in the natural rubber business, geographic diversity in terms of sales, strategies to partially mitigate price risk such as hedging and back-to-back buying and selling, in-depth knowledge of the natural rubber (NR) industry, and capable management. However, these strengths are partially offset by fluctuations in the price of natural rubber, and highly competitive market conditions. The rating also reflects STA’s high level of financial leverage, though this is partially mitigated by inventories which are both liquid and marketable.
The “positive” outlook reflects STA’s solid operating performance and stronger global market position. The company’s operating performance benefited from the up cycle in NR prices following a demand increase and a supply deficit during the past year. The rating may be upgraded if STA can establish a track record of profitability and FFO that can withstand NR price volatility. In addition, a strengthened capital structure will be a positive factor for the rating.
TRIS Rating reported that STA is a processor and trader of natural rubber. The company has 18 processing plants located in the southern and northeastern parts of Thailand and two plants in Indonesia. Total plant capacity is 802,964 tonnes per year. The company’s market share in the global NR industry in the first six months of 2010 was approximately 8.39%, up from 8.20% in the same period of the prior year. Total shipments in the first half of 2010 were 420,766 tonnes. Due to years of experience in the NR industry and well-rounded information on NR positions, the management has been able to manage the company through the peak and troughs of various business cycle while sustaining STA’s strong market position. Approximately 71% of its products are sold directly to tire manufacturers; nine of which are STA’s top 10 customers. Although sales are concentrated in a single industry, STA is fairly diversified in terms of geography and its customer base. The company also expanded its customer base to include small- and medium-sized tire manufacturers. Exports accounted for 81% of total sales in the first six months of 2010. Approximately 82% of export sales were to customers in Asia; mainly China, Singapore, India and Korea. About 11% and 7% of revenue came from customers in the United States and Europe, respectively.
TRIS Rating said, the current world’s major NR producing nations are Thailand, Indonesia and Malaysia. In 2009, these three countries accounted for 67% of global production of 9.7 million tonnes. Thailand was the largest producer, with total production volume of 3.16 million tonnes, followed by Indonesia (2.44 million tonnes) and Malaysia (0.86 million tonnes). NR is used as a raw material in various industries, including tires, surgical gloves, condoms, and footwear. Global NR consumption has grown steadily during the past decade. However, in 2009, global NR consumption declined to 9.4 million tonnes, compared with 10.2 million tonnes in 2008. Demand for NR declined sharply in the fourth quarter of 2008. The drop was due to the automotive industry slump as a result of a near- worldwide credit crunch and economic downturn. A sharp decline in vehicle sales affected demand for tire. Tire manufacturers are by far the largest end-users of NR, as they consume approximately 70% of global production. It is expected that demand for NR will continue to grow in the medium term, underpinned by booming sales of vehicles in emerging markets, especially China and India, and a gradual economic recovery in developed countries.
The NR processing industry is labor intensive. Raw material costs account for approximately 90%-95% of the processing costs. Processors are thus exposed to volatile NR prices, and as a result, earnings and cash flow tend to fluctuate. To mitigate price risk and stabilize earnings and cash flow, STA adjusted its marketing strategy to employ a back- to-back selling and buying strategy. The company also strives to have more direct contact with end-users and farmers. However, price risk is unavoidable during periods of high rubber price volatility.
According to TRIS Rating, STA reported a favourable operating performance in the first nine months of 2010. Both sales and net profit hit record highs, underpinned by higher NR prices and a greater number of shipments. For the first nine months of 2010, the average Standard Thai Rubber 20 (STR20) price was Bt102.58 per kilogram (kg.), up by 61% from 2009. The price rise was due to the demand driven on top of fears of lower supply due to unfavorable weather conditions as well as currencies of the NR exporting nations appreciated against the US dollar. In terms of volume, STA’s shipments in the first nine months of 2010 were 633,321 tonnes, up by 98,494 tonnes from the same period of the prior year. The rise was mainly due to improving demand in the United States, Europe and robust demand in the domestic market. Operating margin before depreciation was 4.3%, up from 2% in 2009. With strong operating performance, lower interest rates and higher dividend income from subsidiaries, funds from operations (FFO) in the first nine months of 2010 surged to Bt3,161 million, almost three times the level in 2009. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio in the first nine months of 2010 improved to 14.27 times, compared with 6.05 times in the same period of the prior year.
As of September 2010, total indebtedness was Bt14,859 million, up from Bt10,676 million as of September 2009, due to higher trade volume and NR prices. Most of STA’s debt was used to finance inventory. Despite the rise in debt, all leverage ratios improved satisfactorily. The total debt to capitalization ratio was 60.91%, down from 65.19% in 2009. The ratio of FFO to total debt rose to 21.27%, compared with -0.21% in the same period of the prior year. With its planned investments to expand block rubber processing capacity and increase sales volume, STA’s leverage is expected to increase in the medium term. However, the level of leverage may be tempered by proceeds from a new capital issue. STA plans to raise funds by issuing 280 million new shares on the main board of the Singapore Exchange Securities Trading Ltd. (SGX-ST) in the first quarter of 2011, said TRIS Rating. -- End
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