TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of Khon Kaen Sugar Industry PLC (KSL) at “A”. At the same time, TRIS Rating has assigned a rating of “A” to KSL’s proposed issue of up to Bt1,000 million in senior unsecured debentures. The outlook remains “stable”. The ratings reflect the company’s long track record in the sugar and sugarcane industry as one of the leading sugar producers in Thailand and its diversification into sugar-related businesses. The ratings also take into consideration the currently low sugar prices, the company’s exposure to the regulatory and operational risks of its sugar operations in the Lao People’s Democratic Republic (Lao PDR) and Cambodia, as well as the volatility of sugarcane supply. The “stable” outlook reflects TRIS Rating’s expectation that KSL will maintain its competitive position in the Thai sugar industry. Revenue sharing system of the sugar industry, strong demand for ethanol, and reliable income from power businesses will be a cushion for the company during the down cycle of the sugar industry.
KSL is one of the leading sugar producers in Thailand, established in 1945 by the Chinthammit family and associates. As of April 2014, the Chinthammit family collectively held 70.0% of the company’s shares. The company owns and operates five sugar plants in Thailand, with a combined cane crushing capacity of 102,000 cane tonnes per day as of May 2014. KSL Group has procured 8.5 million tonnes of sugarcane in the 2013/2014 period and produced 900,665 tonnes of sugar. KSL’s sugar production in the 2013/2014 period was ranked fourth with a market share of 8.2%, following the Mitr Phol Group (19.4%), the Thai Roong Ruang Group (15.5%), and the Thai Ekkalak Group (9.6%).
Since fiscal year (FY) 2006, KSL expanded along the sugar value chain to maximize the utilization of sugarcane. KSL’s sugar-related businesses include the electricity generation and ethanol production. During FY2013 and the first half of 2014, revenue from the energy segment (electricity and ethanol) accounted for 20% of total sales.
Apart from sugar business in Thailand, KSL also operates sugar plants in Lao PDR and Cambodia. The plants in Lao PDR and Cambodia started commercial production in FY2010. After encountering low sugarcane yield from cane disease for years, sugarcane yield in Lao PDR and Cambodia improved from average 2.9 tonnes cane per rai to 7.9 tonnes cane per rai during the 2013/2014 period. However, the export price of raw sugar to European Union (EU) fell sharply by 36% during the first six months of FY2014 due to oversupply situation in EU. As a result, KSL’s operations in Lao PDR and Cambodia continued to report loss of Bt67 million in the first half of FY2014.
Due to declining trend of sugar price, KSL’s financial performances for FY2013-2014 were moderate. KSL’s revenue declined by 15% to Bt18,941 million in FY2012-2013, from Bt22,212 million in FY2011-2012. For the first six months of 2014, total revenues was Bt7,429 million, decreasing by 19% over the same period of FY2012-2013. This was mainly due to a 25.3% decline in export volume. Some export customers delayed their shipments to the second half of FY2014. KSL’s gross margin diminished from 25.8% in FY2012 to 21.0% in FY2013 due to falling sugar prices and higher cost from KSL’s machinery difficulty and weak sugar yield. However, the gross margin for the first six months of FY2014 improved to 33.5%. This is because of higher mix of domestic white sugar during the period and falling production cost of sugar from higher cane crushing yield. The margin was also supported by strong margin of energy-related segment. In FY2013, strong growth of ethanol’s consumption in Thailand droved the reference price of ethanol to rise by 15.1% to Bt24.13 per liter in FY2013. The ethanol price further rose to Bt27.48 per liter in the first six months of FY2014, a 26.4% increase over the same period of the prior year. As a result, gross margin of ethanol segment was high at 31.0% in the first six months of FY2014. In addition, KSL’s margin in power business remained high at 53.8% during the first half of FY2014. KSL’s EBITDA during the first six months of FY2014 improved to Bt2,229 million, from Bt1,901 million over the same period of FY2013.
KSL’s financial leverage was moderately high with a debt to capitalization ratio of 57.3% at the end of FY2013. At the end of April 2014, the total debt to capitalization was seasonally high at 66.15%. KSL’s leverage is expected to improve at the end of FY2014. During FY2014-2016, KSL’s capital expenditures are set at Bt2,000 million to Bt3,000 million per year. Recently, KSL’s announced to buy a 9.3% stake in Mudman Co., Ltd., the food and restaurant operator in Thailand. The investment cost will be Bt350 million. With expected KSL’s total EBITDA (earnings before interest, tax, depreciation and amortization) of approximately Bt4,000 million per year and planned investments, the company’s leverage is expected to fall below 60% in the medium term.
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 slightly increase to 182.0 million tonnes in the 2013/2014 season because production drops in Brazil, the EU, and Mexico will offset production growth in Thailand and South Africa. Sugar consumption is expected to grow by 2.1% to 179.6 million tonnes in the 2013/2014 season. Thus, global sugar production is projected to surpass consumption for the fourth consecutive year.
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