TRIS Rating has assigned a rating of “BBB” to the proposed issue of up to Bt8,500 million in senior debentures of Double A (1991) PLC (DA). At the same time, TRIS Rating has affirmed the company and current issue ratings of DA at “BBB”. The outlook remains “negative”. The proceeds from the new debentures will be used to refinance its existing debentures (AA136A and AA148A), to finance planned capital expenditures and working capital. 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.
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.
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 the sale of paper products accounted for approximately 90% of total sales, while revenues from the sale of pulp products accounted for the balance. DA’s revenue sources are geographically diverse. In the first nine months of 2012, sales in domestic market (Thailand) comprised 35% of total revenue, while 51% of total revenue came from other markets in Asia, and 14% was from the rest of the world.
As of September 2012, the company was 76.2% owned by Mr. Yothin Dumnernchanvanit and concert parties. The company delisted from the Stock Exchange of Thailand (SET) on 17 April 2008 in order to reorganize the corporate structure of DA and its Group. DA planned to re-list the company on a regional stock 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 taken longer than expected.
In 2011, the company’s operating performance was weak. Although sales revenue held steady at Bt18,317 million, operating costs increased significantly. DA reported a net loss of Bt105 million for the year. The weaker operating results were primarily due to rises in the prices of wood chip and long fiber pulp, two key raw materials, plus higher marketing expenses, and the appreciation of the Thai baht against the US dollar by 3.8% in 2011.
In the first nine months of 2012, DA’s revenues increased by 6.0% year-on-year (y-o-y) to Bt14,850 million. The rise in revenue mainly came from the 3% depreciation of Thai baht against the US dollar and a rise in sale volume of paper. In its line of paper products, DA focuses mainly on P&W paper, especially cut-sized products. Compared with pulp prices, the prices for P&W paper are relatively stable, especially for the “Double A” brand, which accounted for 57.2% of DA’s total paper sales volume. In the first nine months of 2012, DA’s sale volume of paper product increased by 7.2% y-o-y to 409,364 tonnes, while its revenue from the sale of paper products increased by 8.8% to Bt13,827 million, which could offset a drop in DA’s pulp sales. DA’s revenue from the sale of pulp decreased by 20.9% to Bt1,023 million, partly resulted from a decrease in sale volume by 11.9% y-o-y to 52,990 tonnes in the first nine months of 2012.
The company’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 DA’s 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 Bt6,400 million. The company’s profitability was also pressured by the rising costs of major raw materials, particularly wood chips. The cost of wood chips increased by 11.4% in 2011, partly due to a higher handling and transportation costs, 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 nine months of 2012, this ratio slightly improved to 10.7%, as the cost of wood chips and long-fiber pulp slightly declined plus DA also 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 contract farmers. This strategy is expected to reduce raw material costs and ensure an adequate supply of wood in the long term. The benefits of the strategy will fully realized from 2014 onwards. In addition, the company plans to reduce the use of long-fiber pulp, and produce paper using only short-fiber pulp. This change should come after PM#3 starts up in 2013.
The company’s capital structure has been weakening during 2010-2012. Total debt increased from Bt13,754 million at the end of 2010 to Bt18,801 million at the end of September 2012 partly to finance the construction of PM#3. Due to an asset appraisal surplus of approximately Bt3,400 million in 2011, the debt to capitalization ratio held at approximately 57% as of September 2012.
Company Rating: BBB Issue Ratings: AA136A: Bt5,000 million senior debentures due 2013 BBB AA148A: Bt2,500 million senior debentures due 2014 BBB DA15DA: Bt2,500 million senior debentures due 2015 BBB DA16DA: Bt1,500 million senior debentures due 2016 BBB DA17DA: Bt1,000 million senior debentures due 2017 BBB Up to Bt8,500 million senior debentures due within 2018 BBB Rating Outlook: Negative
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