TRIS Rating has affirmed the company and senior unsecured debenture ratings of Oishi Group PLC (OISHI) at “A-” with “stable” outlook. The ratings reflect the company’s position as the leading producer of green tea in Thailand and its well-recognized brand. The ratings also take into consideration the support from its parent company, Thai Beverage PLC (ThaiBev), in terms of managerial talent, an extensive distribution network, and shared production facilities. These strengths are partially constrained by intense competition, weaker demand for green tea beverages, and a rise in leverage. The “stable” outlook is based on the expectation that OISHI will maintain its competitive position and benefit from synergies with ThaiBev. The operating performance and its ability to generate cash should be improved. Any large expansion or acquisition plan, should be considered to maintain a strong capital structure.
OISHI operates in two main segments, non-alcoholic beverages and food services. OISHI’s products are positioned in Japanese-style and have been heavily focused on the “Oishi” brand. OISHI’s non-alcoholic beverages cover ready-to-drink (RTD) green tea, herbal tea, and functional drinks. OISHI has three beverage production facilities, with a combined annual production capacity of 464 million liters as of September 2014. In the food segment, OISHI operates a Japanese restaurant chain, supplies frozen and chilled foods, and offers a food delivery service. OISHI owned 206 restaurant outlets as of September 2014. A new central kitchen located in Chonburi province was opened in January 2014, replacing the old one in Pathumthani province.
OISHI’s business profile is supported by its leading position in the Thai RTD green tea segment. OISHI had a market share of about 44% of the Thai RTD green tea market for the first nine months of 2014. Green tea consumption rose rapidly during the past three years, as green tea makers unveiled many aggressive promotional campaigns. However, consumption is expected to drop in 2014 because producers launched fewer promotions this year. Growth prospects are not as rosy as they had been in the past. In the food service segment, OISHI has good growth prospects in the restaurant segment, considering its brand equity and moderate level of market coverage. OISHI’s strategy is to add at least 40 branches every year, spreading across big cities in Thailand. OISHI also plans to open outlets in neighboring ASEAN countries, and seek opportunities in new food categories.
As of August 2014, ThaiBev controlled about 79.7% of OISHI’s outstanding shares. As part of the ThaiBev Group, a Thai leading beverage producer and distributor, OISHI receives support and benefits from synergies, including designated managerial talent, distribution services, and shared production facilities. ThaiBev’s extensive distribution network provides OISHI with nationwide market coverage and growth opportunities in export markets. OISHI shares some production facilities with ThaiBev, which could maximize the utilization rates. In addition, OISHI can pool its purchases with ThaiBev, giving OISHI greater bargaining power with its counterparties.
In 2013, OISHI’s revenue grew by 5% to Bt12,208 million, and further rose by 2% year-on-year (y-o-y) for the first nine months of 2014. Revenue growth was mainly driven by food segment. Food sales grew by 12% during 2013 and 8% y-o-y in the first nine months of 2014, supported by the increase in number of outlets. In contrast, sales in beverages segment dropped by 1% in 2013, and by 4.5% y-o-y for the first nine months of 2014. The drop in revenue was largely due to shrinking consumption and less promotions. The beverage segment was used to generate over 50% of OISHI's total revenue in the past, but reduced to 46% for the first nine months of 2014. In 2014, the Thai RTD tea market has suffered from the economic slowdown and fewer marketing campaigns. The value of the market segment for the first nine months of 2014 dropped by 4.4% y-o-y, compared with double-digit growth rates during 2011-2013. The RTD tea market is intensely competitive, with a large number of competitors and easy product substitution. Hence, marketing activities and promotional campaigns are needed to boosts demand.
OISHI’s operating margin (operating income before depreciation and amortization as a percentage of revenue) dropped from 10.4% in 2013 to 9.1% for the first nine months of 2014, mainly affected by the food segment. The earnings before interest, tax, depreciation, and amortization (EBITDA) margin in the food segment was lower from 9.7% in 2013 to 8% for the first nine months of 2014, because of higher labor costs and negative same store sales. The EBITDA margin in the beverage segment improvedto 12% for the first nine months of 2014, compared with 5% in the same period of the previous year. The improved margin was partly supported by the cost saving OISHI obtained from its efficient cold aseptic filling (CAF) production lines. However, OISHI’s selling expense and administrative expenses remained high at about 30% of revenue, in an effort to boost demand. Liquidity is softening, but remains acceptable. The ratio of funds from operations (FFO) to total debt dropped from 61.3% in 2013, to 45.4% for the first nine months of 2014 (annualized, from the trailing 12 months).
During 2014-2017, TRIS Rating’s base-case scenario expects OISHI’s revenues will grow at 4%-7% per annum, driven by increases in the number of food outlets. The RTD tea segment is expected to gradually recover next year, in line with the economic recovery and preference on healthy drinks. The operating margin is expected to stay above 10%, backed by resilient demand in the food segment and an advantageous cost position in the beverages segment. Selling expenses are expected to remain high, to enhance sales growth and strengthen its brand. During 2014-2017, OISHI is expected to generate FFO in a range of Bt1,200-Bt1,700 million per annum.
Total debt rose to Bt3,003 million at the end of September 2014, from Bt2,063 million in 2013, as OISHI expanded its production capacity and constructed a new central kitchen. As a result, the debt to capitalization ratio rose from 37.7% in 2013 to 47.2% as of September 2014. During 2014-2017, TRIS Rating expects OISHI will spend about Bt4,500 million in capital expenditures which will be used to expand the number of food outlets and for beverage production lines maintenance. In the medium term, the total debt to capitalization ratio is expected to stay below 50%. In this forecast, TRIS Rating does not incorporate any new investments or large acquisitions budget.
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