TRIS Rating has affirmed the company and issue ratings of Sri Trang Agro-Industry PLC (STA) at “A-” with “stable” outlook. The ratings reflect the company’s leading position in the natural rubber (NR) industry, geographically diverse customer base, strong balance sheet, plus the good track record of its management team. However, these strengths are partially offset by the cyclical nature of NR prices and weaker prospects in the demand following the uncertainty of the world economic recovery. 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 volatile nature of the NR industry and the uncertainties in many economies around the world.
STA is one of the world’s leading processors and merchandisers of NR. The company has 21 processing plants located in the southern and northeastern parts of Thailand, and two plants in Indonesia. As of 30 September 2013, the company’s total processing capacity was 1,230,258 tonnes per year. The company’s market share in the global NR industry in the first half of 2013 was 9.7%, up from 8.9% in the same period of the prior year. STA is exposed to cyclicality of NR industry. However, based on years of experience in the NR industry and in-depth competitive information on NR situations, the management team has been able to manage the company through the peaks and troughs of numerous business cycles while maintaining STA’s strong market position. For the first nine months of 2013, STA shipped 811,277 tonnes of NR to its customers, a rise of 12.4% from the same period of the prior year. Approximately 80% of its products are sold directly to end-users, which are mostly tire manufacturers. Although sales are concentrated in a single industry, STA is fairly diversified in terms of geography and its customer base. Exports accounted for 85% of STA’s total sales volume in the first nine months of 2013. China was the largest export market, accounting for 48% of export sales volume, up from 40% in the same period of the prior year.
Currently, the major NR producing nations are Thailand, Indonesia, and Malaysia. In the first six months of 2013, these three countries accounted for 70% of global production of 5.23 million tonnes. Thailand was the largest producer, with a total production volume of 1.69 million tonnes, followed by Indonesia (1.59 million tonnes) and Malaysia (0.39 million tonnes). In terms of consumption, demand for NR worldwide has increased steadily over the past decade, climbing from 7.56 million tonnes in 2002 to 11.04 million tonnes in 2012. China consumes 35% of the amount of NR produced worldwide. Despite a global economic slowdown in 2013, worldwide NR consumption was 5.49 million tonnes for the first six months of 2013, rising by 1.1% compared with the same period of the prior year. This was due to the rising demand from tyre manufacturers in China, which is the world’s largest NR consumer. The cancellation of levying import tax in the United States (US) also urged China to increase export volume to the US.
Raw material costs account for approximately 96%-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 rubber growers to evaluate demand and supply in the market. However, price risk is inevitable during periods of high rubber price volatility, as evident from the second half of 2012 through the second half of 2013.
STA’s operating performance in 2013 was better than in 2012. STA’s volume of shipments increased by 12.41% from 721,730 tonnes during the first nine months of 2012 to 811,277 tonnes in the first nine months of 2013. Its gross margin during the first nine months of 2013 increased to 5.5%, compared with 3.5% during the same period of 2012. STA’s operating margin before depreciation improved to 2.27% during the first nine months of 2013, compared with 0.26% in the first nine months of 2012. Although STA’s total debt slightly increased to Bt15,858 million as of September 2013, from Bt14,853 million as of December 2012, its debt to capitalization ratio remained healthy at 44.76% as of September 2013.
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