TRIS Rating has affirmed the company and current senior unsecured debenture ratings of Betagro PLC (BTG) at “A”. At the same time, TRIS Rating has assigned a rating of “A” to BTG’s proposed issue of up to Bt1,200 million in senior unsecured debentures. The outlook remains “stable”. The ratings reflect the company’s proven record in the Thai agribusiness and food industries, its fully vertical integration across diverse product lines, and its focus on value-added and branded products. The ratings also take into consideration the inherent cyclicality of the commodity-type products and grain cost, exposure to disease outbreaks, and changes in the regulation and import tariffs of importing countries. The “stable” outlook reflects the expectation that BTG will be able to maintain its leading positions in the Thai agribusiness and food industries. The strategy to focus on value-added and branded products should partially offset the cyclical nature of commodity-like farm products and disease epidemics.
BTG was incorporated in 1967 by the Taepaisitphongse family and its associates. The company is one of the leading agribusiness and food companies in Thailand. As of June 2014, the Taepaisitphongse family directly held 14.33% of the company’s shares and also indirectly held 69.45% through Betagro Holding Co., Ltd., BTG’s parent company. The company’s business is divided into eight segments comprising feed, poultry, swine, food, regional, animal health and technology, overseas operations, and others. In 2013, revenue from poultry products contributed 37% of BTG’s total sales, followed by feed (36%), and swine (17%). Domestic sales accounted for 87% of total sales, with the remaining 13% generated from export sales.
Since its first joint venture with a Japanese company in 1980, BTG has continuously expanded through joint ventures, mostly with Japanese partners. Apart from serving as export channels, the ventures provide BTG with the opportunity to improve its operations and the opportunity for technology transfers, especially the Specific Pathogen Free (SPF) technique for swine farming. With these types of collaborative efforts, BTG has become an industry-leading producer of high-quality pork meat in Thailand. After Saha Farm Group (Saha Farm) cut its production, BTG became the country’s second-largest chicken meat producer. Currently, the company’s chicken and swine operations are fully vertically integrated, from feed to food products. Fully-integrated operations help BTG’s products meet food safety and traceability standards. BTG’s main export markets are Japan and the countries of the European Union (EU). The products exported to Japan are mostly distributed via its partners.
To overcome the cyclical nature of the industry and the commodity-like nature of the products sold in the industry, BTG is creating value-added products and building its own brands. During the first half of 2014, the percentage of BTG’s value-added food products and branded raw meat products to total sales were 15% and 6%, respectively. However, BTG set ambitious sales targets for its value-added and branded products. The targets call for the percentage of value-added food products and branded raw meat products to comprise 18% and 24% of total sales by 2020, respectively. BTG also created its own domestic distribution channel, “Betagro Shops”, to serve industrial and food service companies. At the end of October 2014, the company had 119 stores nationwide.
After being hit by an over-supply of livestock and record high soybean meal prices in 2012, the livestock industry rebounded in 2013 and the first half of 2014. Strong demand for chicken exports, plus a rebalancing of demand and supply in the domestic poultry industry, boosted chicken prices in both the export and domestic markets. At the same time, swine prices surged. Swine epidemics nationwide caused supply shortages. BTG’s total revenues increased to Bt74,247 million in 2013, rising by 14.9% from Bt64,632 million in 2012. The operating profit margin before depreciation and amortization recovered to 6.6% in 2013, from a low of 2.3% in 2012. As a result, BTG’s earnings before interest, tax, depreciation, and amortization (EBITDA) significantly improved from extraordinary low level at Bt2,159 million in 2012 to Bt5,320 million in 2013.
For the first half of 2014, BTG posted stronger financial performance. Total revenues increased to Bt39,508 million, up by 12% year-on-year (y-o-y). The improvement was supported by strong demand of poultry products from export markets and rising sales of BTG’s pork products in the domestic market. The sales volumes of BTG’s poultry products sold to export markets increased by 7% y-o-y, largely driven by the lifting of import ban on Thai frozen chicken meat from the countries of the EU and Japan. Not only did export volumes increase, but export prices for poultry also surged. According to the Thai Broiler Processing Exporters Association, the prices for poultry products exported from Thailand rose by 9.8% y-o-y in the first half of 2014. Owing to its focus on value-added products, the price of the poultry products BTG exported was increased higher than industry average in the first half of 2014. BTG’s swine business also benefited from its capacity increase and the continuing country’s supply shortage. The shortage resulted in skyrocketing price in the first half of 2014. According to the Thai Feed Mill Association, the average price of fattener for the first half of 2014 soared by 17% y-o-y to Bt74.3 per kilogram. The healthy price of livestock products, both poultry and swine, pushed BTG’s operating margin higher. BTG’s operating profit margin before depreciation and amortization in the first six months of 2014 surged to 9.9% from 6.6% in 2013. EBITDA jumped to Bt4,270 million for the first six months of 2014, compared with EBITDA of Bt5,656 million in 2011 and Bt5,320 million in 2013.
During the first half of 2014, BTG strengthened its financial position by raising Bt820 million in new equity capital. The new equity replaced BTG’s short-term borrowings. As a result, BTG’s total debt declined to Bt10,690 million as of June 2014, from Bt11,991 million at the end of 2013. As of 30 June 2014, BTG’s debt to capitalization ratio improved to 45.2%, from 51.8% at the end of 2013. Liquidity strengthened as the ratio of funds from operations (FFO) to total debt increased from 36.8% in 2013 to 52.7% (annualized, from the trailing 12 months) for the first six months of 2014. For the remainder of the year, BTG’s performance is expected to remain healthy on the back of high swine prices, continued strong demand for poultry in export markets, and manageable feed costs. Moreover, Thai pork plants have been approved to export pork to the Customs Union, comprising Russia, Belarus, and Kazakhstan. The recent food safety problems in China and the gradual lifting of import restrictions on frozen chicken from Thailand raise demand for Thai livestock. However, keeping supply and demand in balance remains a major challenge for poultry industry, especially if Saha Farm, a major poultry producer, resumes normal production after its debt restructuring plan is approved.
Looking forward, BTG plans to spend about Bt12,500 million during 2014-2016. The expansion plans include new farms, new feed and processed food plants, as well as expansions of its distribution channels. These capital expenditures can be mainly funded with operating cash flow, given EBITDA of about Bt5,000-Bt6,000 million per annum during the normal year. As a result, total debt to capitalization ratio is expected to remain moderate over the next few years.
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