TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Double A (1991) PLC (DA) at “BBB” with “stable” outlook. The ratings reflect the position of DA as the leading short-fiber pulp and printing & writing paper (P&W paper) producer in Thailand, its fully integrated and efficient mills, and the relatively strong brand name of its “Double A” paper products. However, these strengths are partially offset by the exposure to foreign exchange risk, increasing leverage, and the inherent price volatility in the pulp and paper industry, though the company has transformed some of its products from commodity-like products to consumer products. In addition, TRIS Rating is also concerned about some of DA’s related-party transactions, which may continue until the reorganization is complete. The “stable” outlook reflects the expectation that DA will be able to maintain its financial leverage and liquidity at appropriate levels. Although the reorganization is ongoing, the company’s financial profile should not deteriorate significantly from its current level. In addition, the company is expected to have only fair and necessary related-party transactions once the business reorganization plan is complete.
TRIS Rating reported that as of September 2011, DA was 93.5% owned by Mr. Yothin Dumnernchanvanit and concert parties. The company was delisted from the Stock Exchange of Thailand (SET) on 17 April 2008 after Mr. Yothin successfully acquired 78.52% of its shares. After delisting, the management reorganized the company. DA planned to re-list the company on a regional market in 2009 but the re-listing has been delayed due to unfavorable economic conditions. In 2009, the company divested its three power plants to National Power Supply PLC (NPS), a related company. After the divestiture, DA and its subsidiaries acquired approximately 36.2% of NPS’s shares. In 2010, the company started the construction of a third paper mill (PM#3). PM#3 is expected to commence operation in the fourth quarter of 2012.
TRIS Rating said, DA is the leading pulp and P&W paper producer in Thailand. The company owns two pulp mills, with a total designed capacity of around 427,000 tonnes per annum (tpa), and three paper processing machines that provide total designed capacity of around 473,000 tpa. Around 70%-80% of pulp production is used internally for its paper mills; the remainder is sold in domestic and export markets. Revenue from paper sales accounted for 90.5% of total sales in the first half of 2011, while revenue from pulp sales accounted for the rest. The company is the major exporter of short-fiber pulp in Thailand, exporting 47,484 tonnes of dried pulp in 2010 and 29,637 tonnes in the first half of 2011. Export sales of pulp in the first half of 2011 increased by 54% year-on-year (y-o-y) in terms of volume, while revenue from pulp sales in Thai baht increased only 46% y-o-y. The lower growth in sales value was due to the appreciation of Thai baht in the first six months of 2011. Pulp prices are relatively volatile due to its commodity-like nature.
For paper products, DA focuses mainly on P&W paper. Compared with pulp prices, prices for P&W paper are relatively stable, especially for cut-sized products. Thus, the value of paper sales in the first six months of 2011 increased by 5% y-o-y, in line with a 7% y-o-y rise in sales volume. Although revenue from sales of pulp and paper rose by 7% in the first half of 2011, profitability was weaker. The declining profitability was due to both an increase spending on marketing campaigns to penetrate new markets in Africa and Eastern Europe, and rising production costs. As a result, operating income as a percentage of sales dropped from 14.0% in 2010 to 10.4% in the first half of 2011. However, the company has implemented a raw material sourcing strategy by starting its own plantation and acquiring wood directly from contract farmers. This strategy may reduce production costs in medium to long term, as wood chips accounted for approximately 47% of pulp production cost. In addition, the company plans to lower the use of long fiber pulp, which it has to import, and switch to use only short-fiber pulp to produce paper.
At the end of June 2011, outstanding debts totaled Bt14,455 million, up from Bt13,754 million at the end of 2010. Short-term borrowings accounted for around 33% of total debt; most of which were trade finance obligations. At the end of 2010, the total debt to capitalization ratio increased to 55.9% from 45.0% at the end of 2009 because DA repurchased 14.64% of its outstanding shares in June 2010 at the price of Bt39 per share. Therefore, DA spent approximately Bt3,040 million on the transaction, which reduced DA’s equity base by the same amount. However, the equity base was enlarged in the first half of 2011, as the company recorded an asset appraisal surplus of approximately Bt3,200 million. As a result, the total debt to capitalization ratio improved to 50.4% at the end of June 2011. However, DA’s leverage is expected to increase, since the company has to invest around Bt6,600 million to build PM#3 and Bt1,400 million to construct a paper mill in Bangladesh during 2011-2013. — End
Company Rating: Affirmed at BBB Issue Ratings: AA136A: Bt5,000 million senior debentures due 2013 Affirmed at BBB AA148A: Bt2,500 million senior debentures due 2014 Affirmed at BBB Rating Outlook: Stable
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