TRIS Rating has affirmed the company and senior unsecured debenture ratings of Double A (1991) PLC (DA) at “BBB” with “stable” outlook. The ratings continue to reflect the company’s position as one of the leading printing & writing (P&W) paper producers in Thailand, its fully integrated pulp and paper mills, and the strong brand name of “Double A” products. However, these strengths are partially offset by the inherent volatility in the pulp and paper industry, DA’s exposure to foreign exchange risk, and a soft demand for P&W paper due to the sluggish global recovery and a substitution effect from digital media. The success of market penetration after doubled paper capacity expansion, and some related-party transactions remain rating concerns. The “stable” outlook reflects an expectation that DA’s operation will recover from 2015 onwards. Increasing capacity utilization of the new mills should lower its production cost, and help resume the company’s cost competitive edge in the medium term.
DA is the leading P&W paper producer in Thailand. It currently owns and operates five paper mills, with total design capacities of 1,045,000 tonnes per annum (tpa). Its paper production capacity doubled after the start-up of Advance Paper Mill 3 (APM3) in late 2012, and the acquisition of Alizay mill (Alizay) in France in early 2013. Compared with its own pulp production capacity of 427,000 tpa, DA needs to procure some pulps from the market.
Currently, paper sales accounted for 97.7% of the company’s total sales. DA’s markets are geographically diverse, and it has a strong distribution network covering over 138 countries worldwide. Its sales in the domestic market comprised nearly 30% of total sales. About 50% came from other markets in Asia, and 20% from the rest of the world.
In November 2012, DA started up APM3, with a capacity of 220,000 tpa of paper products. The total investment was about Bt5,000 million. It is the most efficient paper mill among all DA’s mills, and is designed to use 100% of short-fiber pulp as raw material. APM3 started to commercialize in August 2013, and ramped up its capacity to reach 85% in the third quarter of 2014.
In January 2013, DA acquired Alizay for EUR18 million. Alizay is a paper mill located in France, with a capacity of 300,000 tpa. Additional investment of EUR17 million was made so as to start up the mill, which had ceased operations since 2010. This mill is positioned as a production base for the DA Group to serve markets in Europe, the Middle East, Africa, and North America. Alizay began to commercialize in May 2013, and its capacity utilization was ramped up to reach 54% in the third quarter of 2014.
DA reported the weakening results in 2013-2014. An effort to build its brand awareness in Europe, where Alizay is located, caused a surge in the marketing expense for the final quarter of 2013, and therefore affected the full-year performance of 2013. For the first nine month of 2014, though the company’s marketing expense declined to normal level, its profitability was still affected by higher fixed production cost from the new paper mills which had not yet run at full capacities. As a consequence, DA’s gross margin fell to 18.1% in the first nine month of 2014, compared with an average of 25.4% during 2011-2013. The operating profit margin (operating income before depreciation and amortization as percentage of sales) then decreased to 6.8%, compared with an average of 10.6% during 2011-2013.
DA’s earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio fell to 1.9 times for the first nine month of 2014, versus an average of 2.6 times during 2011-2013. The debt to capitalization ratio at the end of September 2014 stood at 57%, a relatively stable level compared with the past three years. An asset revaluation of about Bt2,000 million in 2013 built up its equity base.
TRIS Rating expects DA’s operations to bottom out in 2014, and turn a profit from 2015 onwards. The company plans to dilute its holding in National Power Supply PLC (NPS), the associated company, from 36.2% to about 25.5% at the end of 2014. Excluding an extra gain of about Bt900 million from the transaction, DA is expected to face losses from operations of about Bt1,000 million in 2014.
During 2015-2017, DA is expected to generate revenues in a range of Bt24,000-Bt26,000 million per annum. The operating margin should improve to about 12%-13%, following increasing capacity utilization. As a result, FFO should be in a range of Bt2,000-Bt3,000 million per annum. Comparing with its moderate capital expenditures of about Bt1,000-Bt1,500 million per annum, as well as the debt repayment of about Bt3,000-Bt4,500 million per annum, DA is likely to refinance some of its debt obligations.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2014, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating-information/rating-criteria.html.