TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt900 million in senior debentures of Sri Trang Agro-Industry PLC (STA). At the same time, TRIS Rating has affirmed the company and current issue ratings of STA at “A-”. The outlook remains “stable”. The ratings reflect the company’s leading market position in the natural rubber (NR) processing industry, its geographically diverse customer base, and the good track record of its management team. However, these strengths are partially offset by the cyclical nature of NR prices, and the uncertainties of economic recovery worldwide. 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 are sufficiently strong to withstand the high volatility in the NR industry and the uncertainties of worldwide economies.
STA is a world-leading processor and merchandiser of NR. As of December 2012, the company has 20 processing plants located in the southern and northeastern parts of Thailand, and two plants in Indonesia. The company’s total processing capacity was 1.1 million tonnes per year. The company’s market share in the global NR industry in the first nine months of 2012 was 8.9%. Based on years of experience in the NR industry, 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.
For the first nine months of 2012, total shipments were 721,730 tonnes, relatively unchanged from the same period of the prior year. Approximately 82% of its products are sold directly to users, most of which are tire manufacturers. Although sales are concentrated in a single industry, STA is fairly diversified, in terms of both geographic coverage and customer base. In addition to large and conventional customers, the company expanded its customer base to include small- and medium-sized tire manufacturers. Exports accounted for 83% of total sales volume in the first nine months of 2012. China was the largest export market, accounting for 48% of export sales volume.
Currently, the major NR producing countries are Thailand, Indonesia, and Malaysia. In the first nine months of 2012, production of these three countries accounted for 67.9% of global production of 8.38 million tonnes. Thailand was the largest producer with a total production volume of 2.65 million tonnes, followed by Indonesia (2.35 million tonnes) and Malaysia (0.69 million tonnes). In terms of consumption, demand for NR worldwide has increased steadily over the past decade, rising from 8.54 million tonnes in 2002 to 10.94 million tonnes in 2011. Consumption in China constituted one-third of NR usage worldwide. In the first nine months of 2012, worldwide NR consumption was 8.1 million tonnes, down slightly by 1.1% compared with the same period of the prior year. This shrinkage was due to a slowdown in car production and falling demand for replacement tires. However, over the medium term, NR consumption is expected to grow steadily, though at a slower rate. The growth will come mainly from the Asia Pacific region, led by China and India. NR demand will grow in tandem with demand for tires. The recovery of motor vehicle production worldwide, and an increase in the number of motor vehicles puts into service should drive demand for tires and NR higher.
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 flows tend to fluctuate. In order to stabilize profitability, STA has implemented a back-to-back buying and selling strategy to mitigate price risk and has managed to increase its sales volume to compensate for the narrower margins, which are common during difficult market conditions. The company also strives to have more direct contact with end-users and farmers so as to evaluate prevailing demand and supply conditions in the market. However, price risk is unavoidable when rubber prices are volatile as evident in the second half of 2011 through the first nine months of 2012.
STA’s operating performance in the first nine months of 2012 was weak due to the volatile NR prices. Shipments were relatively flat at 721,730 tonnes in the first nine months of 2012. Net profit for the first nine months of 2012 dropped to Bt743 million, down 62% compared with the same period of the prior year. The price of NR declined by 33% over the same period of prior year in the first nine months of 2012, due to the looming economic crisis in Europe, as well as an economic slowdown in China. At the same time, the price intervention scheme of the government in the rubber market in Thailand caused domestic raw material prices to fall at a pace slower than the drops in the prices of NR products. STA’s operating margin before depreciation (excluding a reversal on the diminution in value of inventories) squeezed to 0.3% during the first nine months of 2012, compared with 2.16% in 2011. STA is in a better position to cope with the current industry down cycle. STA’s capital structure has strengthened, thanks to a substantial capital increase in 2011. The total debt to capitalization ratio improved from 69.2% in 2010 to 50.0% in 2011, and to 42.7% in the first nine months 2012. Total debt as of September 2012 was Bt13,399 million, down from Bt18,034 million as of December 2011 because STA needed less working capital after the price of NR declined.
Company Rating: A- Issue Ratings: STA14DA: Bt1,600 million senior debentures due 2014 A- STA16DA: Bt550 million senior debentures due 2016 A- Up to Bt900 million senior debentures due within 2018 A- Rating Outlook: Stable
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