TRIS Rating Co., Ltd. has revised the rating outlook of Double A (1991) PLC (DA) to “negative” from “stable”. At the same time, TRIS Rating has affirmed the company and existing issue ratings of DA at “BBB” and has assigned a rating of “BBB” to DA’s proposed issue of up to Bt5,000 million in senior debentures. The outlook revision reflects the company’s weakening operating performance as a result of its higher operating costs and deteriorating balance sheet. The “negative” outlook reflects an expected deterioration in DA’s credit profile caused by its weakening operating performance and deteriorating balance sheet. The outlook could be revised back to “stable” if the company demonstrates an ability to restore operating performance close to its normal level. However, the ratings could be downgraded if DA’s needs more time to restore its cost advantage and financial profile.
TRIS Rating reported that DA’s ratings continue to reflect the company’s position as one of the leading printing & writing (P&W) paper producers in Thailand, its fully integrated and efficient paper mills, and the strong brand name of its “Double A” paper products. However, these strengths are partially offset by the inherent volatility in the pulp and paper industry, its exposure to foreign exchange risk, and softening demand for P&W paper following the global economic slowdowns. The on-going restructuring of the DA Group and some of related-party transactions during the restructuring process remain rating concerns.
TRIS Rating said, DA is the leading P&W paper producer in Thailand. The company owns three paper processing mills with a total design capacity of 473,000 tonnes per annum (tpa.). The company also owns two pulp mills, with a total design capacity of around 427,000 tpa. Approximately 85% of the company’s pulp production is used internally to produce paper products. During the past three years, revenues from paper products accounted for approximately 90% of total sales, while revenues from the sales of pulp products accounted for 10% of total sales. DA’s revenues are geographically diversified. In the first quarter of 2012, sales in domestic market (Thailand) comprised 33% of total revenue, while 52% came from other markets in Asia and 15% was from the rest of the world.
As of March 2012, DA was 76.2% owned by Mr. Yothin Dumnernchanvanit and concert parties. The company was delisted from the Stock Exchange of Thailand (SET) on 17 April 2008 in order to reorganize the structure of DA and its Group. 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. During 2009-2011, there were a number of asset transfers and divestments within the Group. The restructuring plans have changed frequently and the restructuring has been taken longer than expected.
For 2011, DA’s operating performance was weak. Although the sales revenue held steady at Bt18,317 million, operating cost increased significantly. DA reported a net loss of Bt105 million for the year. The rises in the prices of wood chip and long fiber pulp, key raw materials, plus higher marketing expenses and the appreciation of the Thai baht against the US dollar, were the main reasons for the company’s weakening operating results.
DA’s sales volumes of paper and pulp products in 2011 were relatively flat at approximately 500,000 tonnes and 73,000 tonnes, respectively. As approximately 70% of the company’s revenues was from exports, the appreciation of the Thai baht against the US dollar affected sales revenues. The baht appreciated by approximately 7.5% and 3.8% against the US dollar in 2010 and 2011, respectively. For paper products, DA focuses mainly on P&W paper, especially cut-sized products. Compared with pulp prices, prices for P&W paper are relatively stable, especially for the “Double A” brand, which accounts for approximately 60% of total paper sales volume. The strong “Double A” brand name enabled DA to maintain its selling price in 2011. As a result, DA’s revenues decreased only by 0.8% to Bt18,317 million. In the first half of 2012, revenues were Bt10,281 million, a 3.2% year-on-year (y-o-y) increase. The rise in revenue came mainly from an increase in the average selling price for paper and an increase in sales volumes for both pulp and paper products, which offset the drop in the average selling price of pulp. In the first half of 2012, the sales volume of pulp increased by 6.8% y-o-y, while the sales value decreased by 6.8% to Bt881 million. Paper sales volume increased by 3.7% y-o-y and the sales value increased by 4.3% to Bt9,400 million.
DA’s profitability has been declining since the third quarter of 2010 when the company increased marketing expenditures to penetrate new markets in Africa and Eastern Europe. The marketing campaigns are primarily aimed to support the forthcoming increase in paper production once the third paper mill (PM#3) begins producing paper. PM#3 will be the most efficient paper mill of the Group with a capacity of 220,000 tpa. of paper products. The total investment was worth Bt6,400 million. The company’s profitability was also pressured by the rising costs of major raw materials, particularly wood chips and long-fiber pulp. The cost of wood chips increased by 11.4% in 2011 and by 5.6% y-o-y in the first quarter of 2012, partly due to a higher handling and transportation cost, following the severe flood in Thailand in the second half of 2011. DA’s operating profit margin, excluding depreciation, dropped from 14.0% in 2010 to 8.2% in 2011. In the first half of 2012, this ratio slightly improved to 10.1% as DA cut marketing expenditures. However, the ratio was still lower than in normal years, between 2004 through 2008, of approximately 15.0%.
Looking forward, DA’s profitability could improve if the company’s new raw material sourcing strategy is successfully implemented and if the new paper mill has a successful start-up. The company is currently implementing a new raw material sourcing strategy, procuring wood from its own plantations and from contract farmers. This strategy is expected to reduce raw material costs and ensure an adequate supply of wood in the long term. This benefit is expected to be fully realized from 2014 onwards. In addition, the company plans to reduce the use of long-fiber pulp, and producing paper using only short-fiber pulp. This change will come after PM#3 starts up in late 2012.
DA’s capital structure has been weakening during 2010-2012. Total debt increased from Bt13,754 million at the end of 2010 to Bt18,777 million at the end of June 2012 partly to finance PM#3. Due to an asset appraisal surplus of approximately Bt3,400 million in 2011, its debt to capitalization ratio held at approximately 58% as of June 2012, said TRIS Rating. — 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 Up to Bt5,000 million senior debentures due within 2017 BBB Rating Outlook: Negative
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