TRIS Rating has affirmed the company and senior unsecured debenture ratings of Sri Trang Agro-Industry PLC (STA) at “A-” with “stable” outlook. The ratings reflect the company’s leading position in the natural rubber (NR) industry, diversified customer base, healthy balance sheet, plus the extensive track record of its management team. However, these strengths are partially offset by the cyclical nature of NR prices and narrow margin of mid-stream NR producers. The oversupply situation for an extended period in the NR industry remained the rating concerns. The “stable” outlook reflects the expectation that STA will maintain its competitive position in the NR industry. The company is also expected to manage liquidity and maintain its healthy balance sheet to withstand the down cycle of the NR industry.
STA is one of the world’s leading processors and merchandisers of NR. Currently, the company has 23 processing plants located in Thailand, and two plants in Indonesia. As of 30 September 2014, the company’s total processing capacity was 1,353,904 tonnes per year.
STA is exposed to cyclicality of the NR industry. However, STA’s management team has managed the company through the peaks and troughs of numerous business cycles while maintaining its strong market position. For the first nine months of 2014, STA shipped 881,867 tonnes of NR to its customers, a rise of 8.2% from the same period of the prior year. STA’s market share continually increased. The company’s market share in the global NR industry in the first half of 2014 was 10.2%, up from 7.8% in 2010. Approximately 80% of its products are sold directly to end-users, which are mostly tire manufacturers. Although its sales are concentrated in a single industry, STA is well diversified in terms of geography and its customer base. Exports accounted for 82% of STA’s total sales volume in the first nine months of 2014. China was the largest export market, accounting for 57% of export sales volume, unchanged from the same period of the prior year.
Currently, the major NR producing nations are Thailand, Indonesia, and Malaysia. In the first six months of 2014, these three countries accounted for 70% of the 5.3 million tonnes of NR produced worldwide. Thailand was the largest producer, with a total production volume of 1.70 million tonnes, followed by Indonesia (1.61 million tonnes), and Malaysia (0.39 million tonnes). In terms of consumption, demand for NR worldwide has increased steadily over the past decade, climbing from 7.91 million tonnes in 2003 to 11.36 million tonnes in 2013. China consumes around 36% of the amount of NR produced worldwide. Despite a global economic slowdown in 2013 through the first six months of 2014, worldwide NR consumption rose. NR consumption climbed to 5.80 million tonnes for the first six months of 2014, rising by 4.1% compared with the same period of the prior year. The growth was driven by the rising demand from tyre manufacturers in China, India, and the United States (US), the world’s largest NR consuming nations.
Raw material costs account for 96%-98% of the rubber processing costs for a NR producer. Processors are thus exposed to volatile NR prices, and as a result, earnings and cash flow can fluctuate significantly. The company’s operating margin before depreciation (excluding a reversal on the diminution in value of inventories) hovered in 0.72%-3.79% in 2008-2013. In the first nine months of 2014, a drop in prices of rubber products cut the operating margin before depreciation to 0.64%, compared with 2.49% in 2013. The drop in NR prices came because demand for NR grew at a slower rate, merely 4.1% year-on-year (y-o-y) in the first six months of 2014, amidst global economic uncertainty while the continued increase in NR supply from major NR producing countries. Despite a 8.2% growth in STA’s NR shipments to 881,867 tonnes in the first nine months of 2014, the company’s total revenue declined to Bt57,987 million, a 15% y-o-y drop. STA’s average price for the first nine months of 2014 dropped by 20% y-o-y. The weaker operating margin and falling revenues cut earnings before interest, tax, depreciation, and amortization (EBITDA) to Bt1,839 million in the first nine months of 2014, a 35.3% y-o-y decline.
STA’s balance sheet was relatively healthy. Total debt declined to Bt12,694 million as of September 2014, from Bt19,547 million as of December 2013. The total debt to capitalization ratio improved to 38.54% at the end of September 2014, from 49.34% at the end of 2013. The improvement came mainly from a reduction in working capital and limited capital expenditures. The cash flow protection is considered acceptable during the current down cycle of the NR industry. EBITDA interest coverage ratio was 3.75 times in the first nine months of 2014, compared with 3.71 times in 2013. The fund from operation (FFO) to total debt remained satisfactory at 18.05% (annualized with trailing 12 months) in the first nine months of 2014, compared with 16.46% in 2013.
During 2015-2017, STA’s plans to spend Bt1,500-Bt4,000 million per annum in capital expenditures, primarily to build rubber processing plants in Thailand and abroad. Based on estimated EBITDA of Bt3,000-Bt3,500 million per year, TRIS Rating expects that STA’s capital expenditures can be financed mainly by its operating cash flow.
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