TRIS Rating has affirmed the company and senior debenture ratings of Mitr Phol Sugar Corporation Ltd. (MPSC) at “A+” with “stable” outlook. The ratings reflect the company’s leading market position in the regional sugar industry, well-accepted brand name, efficient sugar mill operations, and its diversification into sugar-related businesses. The ratings also take into consideration the currently low sugar prices, company’s exposure to the regulatory risks and operational risks faced in its overseas sugar operations, as well as the volatility of the supply of sugarcane. The “stable” outlook reflects TRIS Rating’s expectation that the MPSC Group will maintain its leading position in both the Thai and Chinese sugar industries. The revenue sharing arrangement established for the Thai sugar industry, stable power business, and the solid demand for ethanol will help support MPSC’s operations while sugar prices remain low.
MPSC was established in 1946 by the Vongkusolkit family. The Vongkusolkit family collectively holds 100% of the company’s shares through Mid-Siam Sugar Co., Ltd. MPSC owns and operates sugar mills in Thailand, China, Lao PDR, and Australia. In July 2013, MPSC acquired a 25% stake in Singburi Sugar Co., Ltd., a sugar mill held by the Vongkusolkit family. MPSC paid par value for the shares. The investment was worth Bt93.5 million in total. MPSC will consolidate Singburi Sugar’s operation into its portfolio starting in the third quarter of 2013. For the 2012/2013 growing season, the MPSC Group, including Singburi, produced in total 3.7 million tonnes of sugar.
The company has long been the leader in the Thai sugar and sugarcane industry. In the 2012/2013 growing season in Thailand, the MPSC Group produced 2.0 million tonnes of sugar, earning MPSC the highest market share (19.9%) in the industry, based on production volume. MPSC’s market share increased from 19.1% in the previous year after its new mill in Loei province started operation. Behind MPSC was the Thai Roong Ruang Group (16.3% market share), the Thai Ekkalak Group (9.3%), the KSL Group (7.4%), and the Wangkanai Group (6.6%). The cane crushing yield of the MPSC Group was relatively healthy at 105.9 kilograms (kg.) per cane tonne, compared with the industry average of 100.2 kg. per cane tonne.
In China, MPSC currently owns and operates seven sugar mills, which collectively produced 1.14 million tonnes of sugar for the 2012/2013 season. The company is currently the second-largest sugar producer in China, with an 8.7% market share and a crushing yield of 123.2 kg. per cane tonne in the 2012/2013 period. MPSC’s sugar mill in the Lao PDR produced 0.04 million tonnes of sugar in 2012/2013 and the sugar mill in Australia, MSF Sugar (MSF), added 0.53 million tonnes of sugar to MPSC Group’s total production in 2013.
The sugar segment contributed the highest portion of MPSC’s revenues and profit. In 2012, MPSC’s total sales were Bt89,572 million and operating profit before depreciation was Bt15,581 million. The sugar business accounted for 67% of total MPSC’s operating profit. The sugar business in China contributed 37% of operating profit and the sugar business in Thailand contributed 28%. The sugar businesses in the Lao PDR and Australia made marginal contributions to MPSC’s earnings. Mitr Lao provided operating profit of about Bt416 million in 2012 while MSF contributed only Bt64 million of operating profit in 2012.
Apart from the sugar business, MPSC has expanded along the sugar value chain to maximize the utilization of sugarcane. MPSC’s related businesses include generating electricity, producing ethanol, as well as producing wood substitute materials and paper. As of September 2013, MPSC’s ethanol plants in Thailand had a combined production capacity of 960,000 liters per day. MPSC owns a number of electricity generating plants with a combined capacity of 339 megawatts (MW). The profits from the ethanol and power generating segments have increased gradually during the past few years. The operating profit before depreciation from the ethanol and power generating segments rose to a combined total of Bt4,833 million in fiscal year 2012, double the figure of Bt2,425 million in fiscal year 2008, thanks to rising demand for ethanol in Thailand and MPSC’s capacity expansion. The earnings from the ethanol and power generating segments accounted for 31% of total operating profit in 2012.
Despite falling sugar prices worldwide, MPSC’s revenue was considered satisfactory in the first nine months of 2013. Total revenue declined by 5.1% over the same period last year (y-o-y) to Bt68,437 million during the first nine months of 2013. The healthy growth in the ethanol segment and the power segment, as well as higher sales in related businesses, partly helped offset the drop in sugar prices. However, the profitability of the sugar operations has weakened due to the tumbling sugar prices. In addition, MPSC’s sugar operations in China suffered from relatively high cane cost set by the Chinese government. MPSC’s ratio of operating income before depreciation and amortization to sales, including gains from the future contracts, declined to 17.9% in the first nine months of 2013, compared with 22.0% in the same period last year. Earnings before interest, tax, depreciation and amortization (EBITDA) declined to Bt13,177 million in the first nine months of 2013, down 21.6% from Bt16,812 million in the same period last year. The combined operating profit from the electricity segment and the ethanol segment rose by 53% y-o-y partly offsetting the drop in EBITDA from the sugar segment. The EBITDA interest coverage ratio in the first nine months of 2013 continued to be good at 7.9 times, despite softer sugar prices. MPSC’s financial leverage rose to a moderate level. The total debt to capitalization ratio increased to 48.7% as of September 2013, from 44.0% as of December 2011 due to ongoing capacity expansions and higher working capital needs.
Sugar prices are expected to remain low for 2014 as a result of over-supply situation. The Food and Agricultural Organization of the United Nations forecasted that world sugar production would increase by 0.3% to 180.2 million tonnes in 2013/14 because production drops in the European Union (EU), and the United States (US) will offset growth in Thailand, India, and South Africa. Sugar consumption is expected to grow by 1.9% to 175.4 million tonnes in 2013/14. Thus, global sugar production is projected to surpass consumption for the fourth consecutive year. The strong demand for ethanol and higher sugar production in Thailand, underpinned by favorable weather in 2013/14, will partly make up for the weaker sugar prices. Chinese sugar operation remains challenged by low sugar prices even though Chinese government reduced the benchmark price of cane for 2013/14 by approximately 7% from last year. MPSC has completed most of its major expansion projects. As a result, capital expenditures will total Bt5,000-Bt6,000 million per year during 2014 and 2015. This level is lower than the approximate Bt11,000 million MPSC spent per annum during the past few years. MPSC’s financial performances will be weak during the current downturn of the sugar industry. However, moderate capital expenditure would help MPSC maintain its financial leverage and cash flow protection at acceptable levels.
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