TRIS Rating Co., Ltd. has affirmed the company rating of Oishi Group PLC (OISHI) at “A-” with “stable” outlook. The rating reflects OISHI’s leading market position in the Thai ready-to-drink (RTD) tea market, its well-recognized brand, and growth opportunity. The rating also takes into consideration the support OISHI receives from its parent company, Thai Beverage PLC (ThaiBev), which has an extensive nationwide distribution network and sizable production facilities. These strengths are partially constrained by intense competition, high product substitution, softening margins, and the potential for future debt-financed investments. The “stable” outlook is based on the expectation that OISHI will be able to continue to maintain its market-leading position and strengthen its brand equity. Future investments or acquisitions, if any, should be funded partly by operating cash flow to retain an appropriate capital structure.
TRIS Rating reported that OISHI competes in two main segments, non-alcoholic beverages and food, by leveraging its core brand, Oishi, and focusing on a Japanese style. OISHI has two main plants in Navanakorn and Amata Nakorn industrial estates, with a combined annual production capacity of 360 million liters of beverages as of September 2012. The Navanakorn plant also serves as a central kitchen for the food segment. In the last quarter of 2011, OISHI’s facilities at the Navanakorn plant were damaged from the massive floods. OISHI has outsourced beverages from both overseas and domestic manufacturers, including ThaiBev, to help alleviate shortages of its products. Regarding the food business, the company has temporarily relocated its central kitchen in Amata Nakorn and Banbung in Chonburi province, and has outsourced its supply of noodles. In addition, some food materials was transferred to cook and prepared at the restaurant branches directly. At present, the operations at the Navanakorn facility have already resumed. OISHI plans to build two more plants: one in Chonburi province as a central kitchen and another at Saraburi province for beverage production, using Cold Aseptic Filling (CAF) facility.
TRIS Rating said, although its facilities in Navanakorn were flooded, OISHI’s sales in 2011 grew by 8.8% year-on-year (y-o-y) to Bt9,501 million. Sales rose further by 13% y-o-y for the first nine months of 2012. The growth reflected OISHI’s ability to manage its supply chain and distribution network, as well as a ramped up demand after the flood. The growth was also fueled by an expansion in the number of food outlets, promotional campaigns, and marketing activities. During the last five years, the beverages segment contributed around 54%-58% of OISHI's total revenue while the food segment made up the rest.
OISHI is the Thai RTD tea market leader under the Oishi green tea brand. Other beverage products include sparkling green tea, functional drinks, and RTD coffee. Green tea is the key contributor, accounted over 90% of beverage sales. Oishi has about 50% market share of the RTD tea segment. In recent years, OISHI gradually lost some market share due to an increase in the number of rival brands and rivals’ very aggressive promotional effects. The company has countered by launching products in new packaging and offering a full portfolio of products at every price point, aiming to meet customer needs in all market segments. Recently, the company launched Oishi green tea in returnable bottles, seeking a market opportunity in local restaurants. For the food segment, OISHI operates a Japanese restaurant chain, makes frozen and chilled food, and has a food delivery and catering business. Key strategy is to expand the number of outlets, increase market coverage, and offer a variety of food. In mid-2012, OISHI introduced Onori, a flavored seaweed snack, and launched Kakashi, a Japanese-style rice bowl restaurant. As of September 2012, the company had in total 148 restaurant outlets. The revenue from the restaurants constitutes around 95% of the revenue in the food segment.
OISHI enjoys great support from ThaiBev in various aspects, including the mandate of the management team. ThaiBev, topped by the facility of Serm Suk PLC (Sermsuk), is considered to be the distributor that has the most extensive market coverage in Thailand. Its extensive network can transport OISHI's products more broadly to its target customers and could even help OISHI expand into new market segments. The benefits of synergy also extend to production. ThaiBev's sizable production facilities have helped bridge supply gaps during times of shortage, and have also supported the manufacture of new products at efficient cost levels. Lastly, as part of the ThaiBev Group, OISHI has bargaining power with its counterparties.
OISHI’s financial strength is supported by growing sales and ample liquidity. The operating margin before depreciation and amortization, as a percentage of sales, ranged from 15%-16% during 2008-2010. The margin dropped to 13.6% in 2011, and to 11.2% for the first nine months of 2012 due mainly to the negative effects from the floods and higher selling and administrative expenses (SG&A). OISHI’s SG&A as a percentage of sales for the first nine months of 2012 jumped to 24.4%, from 22.4% in 2011. The rise came from higher advertising and promotional expenses to help boost sales, and doubled handling costs as OISHI has to operate two central kitchen sites. SG&A expenses are expected to remain elevated in the medium term due to intensifier competition in beverage business. However, OISHI has adopted new production technology: CAF. CAF will lower beverage packaging costs and the new technology is eligible for the Board of Investment’s (BOI) privileges.
Despite growing sale performance, effects from the flood and aggressive competition mitigated the growth in OISHI’s cash flow. OISHI generated funds from operations (FFOs) of Bt1,304 million in 2011, compared with Bt1,454 million in 2010. FFOs stood at Bt884 million for the first nine months of 2012. The cash flow protection then softened from abnormally high level in the past, but remained healthy. For the first nine months of 2012, the FFO to total debt ratio was 50.1% (non-annualized), while the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage was 32.9 times. OISHI’s total debt has almost tripled from Bt600 million in 2010 to Bt1,766 million at the end of September 2012. The debt was mainly used to fund the expansion of food outlets and investments in new beverage production lines. As a result, the debt to capitalization ratio rose from 18.3% in 2010, to 28.9% in 2011, and to 36.6% at the end of September 2012. In the medium term, the leverage is estimated to rise as OISHI has its planned capital expenditures of Bt2,400-Bt2,700 million per annum during 2013-2015. However, TRIS Rating expects that the company would partly finance its capital expenditures by its operating cash flow. The debt to capitalization ratio is projected to maintain not over 50%, going forward.
The growth prospects for the food and RTD tea segments remain good as consumer behavior trends toward health consciousness. Both market segments are expected to show strong growths through the medium term. However, these two market segments are considered intensely competitive, with a large number of competitors and easy product substitution. Marketing activities and promotional campaigns give significant boost demands. Competition has intensified recently, especially in terms of promotional activities and marketing campaigns. OISHI is facing multiple challenges as it strives to boost profitable sales, develop new products, and maintain its market-leading position in the RTD tea segment, said TRIS Rating. — End
Company Rating: Affirmed at A- Rating Outlook: Stable
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