TRIS Rating has revised the rating outlook of Double A (1991) PLC (DA) to “stable” from “negative”. The outlook revision reflects the recovery of the company’s operating performance. At the same time, TRIS Rating has affirmed the company and existing issue ratings of DA at “BBB”. The “BBB” ratings continue to reflect the company’s position as one of the leading printing & writing (P&W) paper producers in Thailand, its fully integrated pulp and 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, DA’s exposure to foreign exchange risk, and softening demand for P&W paper because of the global economic slowdown. The on-going restructuring of the DA Group and some related-party transactions undertaken during the restructuring process remain rating concerns. The “stable” outlook reflects an expectation that the company will be able to operate PM3 and the Alizay mill as planned. The strong brand name of “Double A” paper is expected to help expand new products and markets to support additional production capacity of the Group.
DA is the leading P&W paper producer in Thailand. In 2013, DA owns and operates two pulp mills, with an aggregate design capacity of 427,000 tonnes per annum (tpa). Its paper production capacity recently doubled to 1,033,000 tpa. In 2012, paper sales accounted for 93.7% of total sales, while pulp sales accounted for the rest. DA’s markets are geographically diverse, and it has a strong distribution network covering 138 countries worldwide. For the first half of 2013, sales in the domestic market (Thailand) comprised 34% of total sales, while 52% came from other markets in Asia and 14% from the rest of the world.
As of June 2013, the company was 76.2% owned by Mr. Yothin Dumnernchanvanit and affiliated parties. The company was delisted from the Stock Exchange of Thailand (SET) on 17 April 2008, in order to reorganize the structure of the DA and its affiliated companies. DA planned to re-list the company on a regional stock exchange in 2009, but the re-listing has been delayed due to unfavorable economic conditions. During 2009-2012, there were a number of asset transfers and divestments within the Group. The restructuring plans have been changed frequently and the restructuring has taken longer than expected.
DA’s core products are 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. In 2012, DA’s total sales was Bt19,226 million, a 5.0% increase. The sales volumes of paper increased by 6.3% to approximately 533,000 tonnes, while the sales volume of short-fiber pulp decreased by 14.1% to approximately 63,000 tonnes. The drop in the sales volume of pulp reflected the new capacity of PM3 and DA’s efforts to increase the proportion of short-fiber pulp it uses to produce its paper.
In November 2012, DA started up Paper Mill 3 (PM3), with a capacity of 220,000 tpa of paper products. PM3 is the most efficient paper mill of all DA’s mills. It is designed to use 100% of short-fiber pulp as raw material. Currently, PM3 is in the test run period, and commercial operations are expected to start within 2013. The total investment for PM3 was Bt6,367 million. In January 2013, DA invested EUR18 million in Alizay Mill, located in France. Alizay mill is a paper mill with capacity of 300,000 tpa. DA needed to make an additional investment of EUR17 million to start up the plant, which ceased operation in 2012. The Alizay mill successfully started up in June 2013. The short-fiber pulp used in this mill will be imported from Thailand. This mill is positioned as a production base for the DA Group to serve markets in Europe, the Middle East, Africa, and North America.
To support the Group’s paper capacity of 1 million tpa, the company introduced a new product for the export market. The new product is 70 grams per square meter (gsm) paper, marketed under the “Double A” brand. The product will be initially sold in Vietnam, Malaysia, China, and Taiwan. This new product will be offered at lower price compared with the 80 gsm “Double A” paper, while maintaining similar quality of the brand.
For the first half of 2013, DA’s total sales were Bt8,408 million, a drop of 15.3% year-on-year (y-o-y). The decrease was mainly due to a 67.5% y-o-y decrease in sales volume of short-fiber pulp sold to outside customers. The sales volume of paper products declined by 8.5% y-o-y to approximately 257,000 tonnes, mainly in the folio products and other brands of cut-sized paper. In contrast, sales of “Double A” paper increased by 1.8% y-o-y.
The company’s profitability for the first six months of 2013 improved because the cost of wood chips and energy declined, and DA consumed less long-fiber pulp. DA’s operating profit margin (operating income before depreciation and amortization as percentage of sales) improved from 8.2% in 2011 to 16.0% in the first half of 2013. The cost of wood chips reduced because the price of wood fell and DA sourced a higher percentage of its wood needs from its own plantation and farmers under direct supply contracts. In addition, DA has implemented a strategy to encourage farmers to utilize the vacant spaces around and in between rice fields (Khan-na) for planting paper trees (Eucalyptus) supplied by DA. This strategy is expected to reduce the cost of wood and ensure an adequate supply of wood in the long term. The benefits from this sourcing strategy are expected to be fully realized from 2015 onwards.
DA plans to invest approximately Bt6,300 million to develop a new pulp mill (Pulp mill 3) with an annual production capacity of 472,500 tonnes to support the recent doubling in paper production capacity. At the end of June 2013, DA’s total debt increased to Bt20,892 million, following the construction of PM3 and the acquisition of the Alizay mill. With an expected EBITDA (earnings before interest, tax, depreciation, and amortization) of Bt4,000-Bt5,000 million per year and scheduled debt repayments of approximately Bt3,000 million per year in 2015-2016, the debt to capitalization ratio will be in the 60.0% range during construction period for the Pulp mill 3, slightly increasing from 58.4% at the end of June 2013.
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