TRIS Rating has downgraded the company rating of Sub Sri Thai PLC (SST) to “BBB-” from “BBB” with “stable” outlook. The downgrade reflects SST’s higher business and financial risks from its expansion into the volatile soybean business via the acquisition of Industrial Enterprises Co., Ltd. (TIP). The rating also takes into consideration the company’s long track record in the warehouse industry and its stable source of income from its document storage business.
The “stable” outlook reflects TRIS Rating’s expectation that the stable income stream from the storage business will partly alleviate the fluctuations of the soybean business. Growing demand for soybean meal and soybean oil plus the well-accepted TIP brand will support SST’s expansion into the soybean business.
TRIS Rating reported that SST is one of the leading provider of storage services for goods and documents. It was established in 1976 and was listed on the Stock Exchange of Thailand (SET) in 1987. The company was initially authorized by the Ministry of Commerce to operate warehouse and wharf businesses in Samutprakarn province. Its business scope was expanded to include document storage services in 1995. Currently, SST owns and operates 51 warehouses and two wharfs with a total storage area of 81,769 square meters (sq.m.). Nearly one-fourth of SST’s warehouse space is used for document storage while 75% is used for goods warehousing. In 2010, the document storage business contributed nearly 60% of SST’s total revenue and earnings before interest, tax, depreciation and amortization (EBITDA), while goods warehousing contributed approximately 40%. Over the past three years, the revenue of the storage business had increased gradually to Bt202 million in 2010 from Bt138 million in 2006. The document storage business was the major driver of the growth. Document volume grew by 10% annually during 2006-2010, with 70%-80% of the additional volume from existing customers while 20%-30% came from new customers. For the goods warehousing business, revenue has remained relatively stable. In 2010, goods warehousing brought in revenue of Bt79 million.
TRIS Rating said that in February 2010, SST announced it would acquire 99.7% of the total outstanding shares of TIP, the producer of “TIP” brand vegetable oil. TIP is in a business rehabilitation process under the supervision of the Bankruptcy Court. The transaction is expected to be completed by April 2011. According to the rehabilitation plan, SST will become the sole owner of TIP. The equity investment will be worth Bt200 million. After completing the acquisition and consolidation of TIP, the business profile of SST will change significantly. SST’s annual crushing plan calls for the sale of 80,000-100,000 tonnes of soybean products namely soybean oil and soybean meal. After acquisition, sales of soybean products are anticipated to account for 80%-90% of SST’s total revenue and 50%-60% of consolidated EBITDA. Soybean oil products will comprise 30%-40% of the total sales of soybean products with soybean meal products constituting the balance. As an energy crop and commodity product, soybean prices fluctuate by nature. The price of soybeans moves in tandem with fuel prices, in addition to being pushed by the demand and supply of soybeans. The retail price of soybean oil is capped by the Internal Trade Department. At the same time, soybean meal produced domestically has to compete with imported soybean meal from major global producers such as Brazil and Argentina. As a result of these market forces, the ability to pass through the increasingly volatile soybean cost to consumers of, both soybean meal and soybean oil, becomes challenging. Limited track record of SST in the soybean business also weights on the business profile.
In 2010, in addition to the storage business, SST also earned income from soybean oil trading after purchasing “TIP” brand and trademark in the second quarter of 2010. Total revenue of SST increased by 40% to Bt273 million, including Bt71 million in revenue from soybean oil trading. Profitability of the storage business remains strong. SST’s operating margin before depreciation and amortization for the storage business was high at 58.7% during 2010. However, the thin margins of oil trading plus the related expenses from the TIP acquisition depressed the company-wide operating margin to 39.0% in 2010 from 62.4% in 2009.
As of December 2010, the company’s total debt was Bt572 million and the debt to capitalization ratio was 33.0%. SST’s financial profile is expected to deteriorate after the full consolidation of TIP in the second half of 2011. Total debt will rise significantly after assuming TIP’s debts of Bt600-Bt700 million. SST plans to fund the TIP transaction by selling nine warehouses used for document storage to a property fund. This transaction will be worth Bt675 million. SST plans to purchase one-third of the property fund and lease back the document storage facility via a 10-year lease agreement with the property fund. The debt to capitalization ratio, including TIP’s debt plus the sale and lease back contract will increase to more than 50% from 33% at the end of 2010. Cash flow protection is expected to weaken due to the low profitability of the soybean business compounded by higher leverage, said TRIS Rating. -- End
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