TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt6,100 million in senior unsecured debentures of Mitr Phol Sugar Corporation Ltd. (MPSC). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of MPSC at “A+”. The outlook remains “stable”. The proceeds from the new debentures will be used for planned capital expenditures. The “A+” ratings reflect the company’s leading market position in the sugar industry within the Asia-Pacific region, 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, the regulatory risks and operational risks facing in its overseas sugar operations, as well as the volatility of the supply of sugarcane. The “stable” outlook reflects TRIS Rating’s expectation that MPSC will maintain its leading position in both the Thai and Chinese sugar industries. The revenue sharing arrangement established for the Thai sugar industry, on top of solid demand for gasohol and 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, the Lao PDR, and Australia. For the 2013/2014 growing season, MPSC produced in total 4.04 million tonnes of sugar.
MPSC has long been the leader in the Thai sugar and sugarcane industry. In the 2013/2014 growing season, six sugar mills of MPSC in Thailand produced 2.3 million tonnes of sugar, earning MPSC the highest market share (20.3%) in the industry, based on production volume. Behind MPSC was the Thai Roong Ruang Group (15.5% market share), the Thai Ekkalak Group (9.3%), the KSL Group (8.0%), and the Wangkanai Group (6.2%). MPSC’s cane crushing yield was relatively healthy at 114.4 kilograms (kg.) per cane tonne in the 2013/2014 growing season, compared with the industry average of 109.3 kg. per cane tonne.
In China, MPSC currently owns and operates seven sugar mills, which collectively produced 1.17 million tonnes of sugar in the 2013/2014 season. The company is currently the second-largest sugar producer in China, with an 8.7% market share and a crushing yield of 126.8 kg. per cane tonne in the 2013/2014 period. MPSC’s sugar mill in the Lao PDR produced 0.04 million tonnes of sugar in 2013/2014 while its sugar mill in Australia, MSF Sugar (MSF), produced 0.56 million tonnes.
The sugar segment contributed the highest portion of MPSC’s revenues. In 2013, MPSC’s total sales were Bt84,331 million. The sugar segment accounted for 81% of total MPSC’s revenues. Sugar production in China contributed 33% of total revenues while sugar production in Thailand contributed 41%. Operations in the Lao PDR and Australia made marginal contributions to MPSC’s earnings. Revenues from Mitr Lao accounted for 1% of total MPSC’s revenues in 2013 while MSF contributed 6%.
Apart from sugar production, 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 June 2014, 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 375.8 megawatts (MW).
Despite falling sugar prices worldwide, MPSC’s revenue was satisfactory in the first six months of 2014. Total revenue declined by 5.5% over the same period last year (y-o-y) to Bt44,788 million during the first six months of 2014. The volume of sugar produced and sold from Thai operations rose by 12.3% y-o-y, while combined sales in ethanol and power segments also increased by 33% over the same period of the prior year to Bt6,598 million. These factors partly helped offset the drop in revenue of sugar operations in China. However, the profitability of the sugar operations has weakened because sugar prices remain low. In addition, MPSC’s sugar operations in China suffered because of the relatively high cost of cane set by the Chinese government in order to benefit cane growers. MPSC’s ratio of operating income before depreciation and amortization to sales, including gains from the futures contracts, declined to 19.2% in the first six months of 2014, compared with 22.5% in the same period last year. Earnings before interest, tax, depreciation, and amortization (EBITDA) declined to Bt9,544 million in the first six months of 2014, down 15.8% from Bt11,333 million in the same period last year. The combined operating profit from the electricity segment and the ethanol segment rose by 33% y-o-y, partly offsetting a 67% drop in the operating profit of the sugar segment. The EBITDA interest coverage ratio in the first six months of 2014 remained good at 7.8 times, despite low sugar prices. MPSC’s financial leverage remained at a moderate level. The total debt to capitalization ratio increased to 53.9% as of June 2014, from 49.0% as of December 2013 due to higher working capital needs during the sugar production period. MPSC has currently completed most of its major expansion projects. As a result, total capital expenditures will be set at Bt5,000-Bt6,000 million per year during 2014 and 2015. This level is much lower than in the recent past. MPSC spent approximately Bt10,000-20,000 million per annum during 2011-2013. MPSC’s financial performances would be soft as long as the current downturn of the sugar industry continues. However, lower capital expenditures would help MPSC maintain its financial leverage and cash flow protection at acceptable levels.
Sugar prices are expected to remain low for the next 12 months because sugar inventories remain high around the world. The United States Department of Agriculture (USDA) estimated that world sugar supply exceeded demand by 1.5 million tonnes in 2013/2014, the fourth consecutive year surplus. For the 2014/2015 growing season, the USDA forecasted that worldwide production would be flat at 175.6 million tones. Production drops in Brazil, China, Pakistan, and Thailand are expected to outpace rising production in India, the Former Soviet Union, and the European Union while global consumption is forecasted to rise, driven by China and India. USDA projected demand for sugar would be 1.1 million tonnes higher than supply in the 2014/2015. If true, this would be the first time in five years that sugar balance would be deficit. However, abundant sugar inventories, which were estimated at about 45.5 million tonnes by USDA, would keep sugar prices low for the foreseeable future.
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