TRIS Rating Co., Ltd. has affirmed the company and senior debenture ratings of Sri Trang Agro-Industry PLC (STA) at “A-” with “stable” outlook. The ratings reflect the company’s leading market position in the production of natural rubber (NR), geographically diverse customer base, strong balance sheet, plus the good track record of its management team, and favorable long-term prospects for NR. However, these strengths are partially offset by the cyclicality nature of NR prices and weaker prospects in the demand following the slowdown of the world economy. The “stable” outlook reflects the expectation that STA will sustain its competitive position in the NR industry. The company’s balance sheet and capital structure is sufficiently strong to withstand the high volatilities in the NR industry and the uncertainties in many economies around the world.
TRIS Rating reported that STA is a world leading processor and merchandiser of NR. The company has 19 processing plants located in the southern and northeastern parts of Thailand, and two plants in Indonesia. As of 30 June 2012, the company’s total processing capacity was 1,065,258 tonnes per year. The company’s market share in the global NR industry in the first three months of 2012 was 10.4%, up from 9.8% in the same period of the prior year. STA is exposed to industry risk, as its business is in cyclical industry. However, based on years of experience in the NR industry and in-depth information on NR positions, the management team has been able to manage the company through the peaks and troughs of various business cycles while sustaining its strong market position.
TRIS Rating said, for the first half of 2012, total shipments were 483,416 tonnes, relatively unchanged from the same period of the prior year. Approximately 82% of its products are sold directly to end-users, mostly tire manufacturers. 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 small- and medium-sized tire manufacturers. Exports accounted for 83% of total sales volume in the first six months of 2012. China was the largest export market, accounting for 45% of export sales volume, up from 37% in the same period of the prior year.
Currently, major NR producing nations are Thailand, Indonesia, and Malaysia. In the first three months of 2012, these three countries accounted for 72.7% of global production of 2.66 million tonnes. Thailand was the largest producer, with a total production volume of 0.96 million tonnes, followed by Indonesia (0.73 million tonnes) and Malaysia (0.24 million tonnes). In terms of consumption, global demand of NR has increased steadily over the past decade, from 7.56 million tonnes in 2002 to 10.92 million tonnes in 2011. China constitutes almost one-third of the world consumption. In the first three months of 2012, worldwide NR consumption was 2.55 million tonnes, down slightly by 0.3% compared with the same period of the prior year. This was due to a widespread slowdown in car production and falling demand for replacement tire. However, over the medium term, NR consumption is expected to grow steadily though at a slower rate, albeit declining demand from Europe and the US. The growth will come mainly from the Asia/Pacific region, led by China and India. NR demand will grow in tandem with tire demand, which should benefit from a rise in both world motor vehicle production level as well as the number of motor vehicles in use.
Raw material costs account for approximately 95%-98% of the rubber processing costs. Processors are thus exposed to volatile NR prices, and as a result, earnings and cash flow tend to fluctuate. In order to stabilize profitability, the company targets to increase sales volume through higher market share to compensate for lower margin during difficult market conditions. The company also strives to have more direct contact with end-users and farmers to evaluate demand and supply in the market. However, price risk is unavoidable during periods of high rubber price volatility, as evident from the second half of 2011 through the first half of 2012.
STA’s operating performance in 2011 was weaker than TRIS Rating’s expectation. Despite a 13% growth in shipments to 951,935 tonnes in 2011, net profit for the full year of 2011 dropped to Bt1,306 million, down 66% compared with the same period of the prior year. This was due to a drop in prices of rubber products. The drop came because demand for tire slipped amidst global economic uncertainty, and the severe flood in Thailand in the last quarter of 2011. The pressure on operating performance continued through the first half of 2012 as the NR price further declined by 30% due to the looming economic crisis in Europe as well as an economic slowdown in China. STA’s operating margin before depreciation (excluding a reversal on the diminution in value of inventories) dropped to 0.13% during the first half of 2012, compared with 2.16% in 2011. Looking forward, STA is in a better position to cope with the currently down cycle of the industry. STA’s capital structure has strengthened, thanks to a substantial capital raising effort in the first quarter of 2011. The total debt to capitalization ratio improved from 69% in 2010 to 50% in 2011, and to 46.5% in the first six months 2012. Total debt as of June 2012 was Bt15,021 million, down from Bt18,034 million as of December 2011, due to lower funding need for working capital after the price of NR declined, said TRIS Rating. — End
Company Rating: Affirmed at A- Issue Ratings: STA14DA: Bt1,600 million senior debentures due 2014 Affirmed at A- STA16DA: Bt550 million senior debentures due 2016 Affirmed at A- Rating Outlook: Stable
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