TRIS Rating has assigned the company rating of Buriam Sugar PLC (BRR) at “BBB-” with “stable” outlook. The rating reflects the company’s long track record in the sugar and sugarcane industry, its high crushing yield, protection under the revenue sharing scheme in the sugar industry in Thailand, and its expansion to power business, which provides some reliable income streams to the company. The strengths are partially offset by small-scale sugar production and its single sugar mill. The rating also takes into consideration the currently low sugar prices, as well as the volatility of sugarcane supply.
The “stable” outlook reflects TRIS Rating’s expectation that BRR will maintain its position in the sugar industry in Thailand. Revenue sharing system of the sugar industry and increasing revenues from power business will provide a cushion for the company during the down cycle of the sugar industry. BRR is expected to manage the total debt to capitalization ratio below 60% during the expansion.
BRR’s credit upsides may happen if the company has more reliable streams of cash flow from power business to alleviate the fluctuation of sugar price. The downside risk could occur if sugar prices continue to slump, leading to noticeably weakening profitability for the extended periods. An aggressive investment is also a negative factor for BRR’s credit rating.
BRR is one of the sugar producers in Thailand. It was established in 1963 by the Tangtrongwechakit family. The company was listed on the Stock Exchange of Thailand (SET) in November 2014. As of March 2015, the Tangtrongwechakit family collectively held 74.3% of the company’s shares. The company owns and operates one sugar plant located in Buriram province, with a cane crushing capacity of 17,000 cane tonnes per day. BRR procured 1.95 million tonnes of sugarcane in the 2014/2015 production period and produced 230,379 tonnes of sugar. For the 2014/2015 production period, BRR’s market share was 2% in terms of sugar production. The company’s crushing yield for the 2014/2015 period was high at 118.07 kilograms (kg.) per cane tonne, better than the industry average of 106.65 kg. The company was ranked number three among 50 sugar mills in Thailand in terms of crushing yield in the 2014/2015 period.
BRR produces two kinds of sugar, brown sugar for domestic customers and raw sugar for export. Apart from sugar business, BRR expanded along the sugar value chain to maximize the utilization of sugarcane. BRR’s sugar-related businesses include the electricity generation and fertilizer. BRR sells 16 megawatts (MW) of power capacity to the Provincial Electricity Authority (PEA) under Very Small Power Producer (VSPP) scheme. The first unit, eight MW of power generating plant and the fertilizer plant, started commercial operation in 2012. Power and fertilizer businesses comprised 8%-12% of BRR’s total sales during 2012-2014. The contribution of power is expected to rise after the second unit of power plant started operation in April 2015.
After a peak in 2011, BRR’s financial performances softened in 2012-2014 following the drop in sugar prices, similar to all sugar millers. BRR’s total sales grew to Bt3,920 million in 2014, an increase of 4.7% per annum (compound annual growth rate - CAGR) during 2011-2014 despite the falling sugar prices. This was due to the increasing volume of sugar production. BRR’s sugar production gradually rose from 174,195 tonnes in 2011 to 209,226 tonnes in 2014 because BRR successfully helped farmers increase cane yield per rai and its crushing yield improved. The commercial operation of the first unit of power plant and the fertilizer plant also underpinned revenue growth. BRR’s operating margin before depreciation and amortization was moderate at 10.1%-13.1% during 2012-2014, close to most of small millers, but lower than 15%-20% of major sugar producers. The plunge in sugar prices curtailed sugar millers’ profitability during 2012-2014. BRR’s operating margin before depreciation and amortization declined to 10.1%-13.1% in 2012-2014 from the peak at 18.3% in 2011. However, the revenue sharing scheme and rising crushed cane partly alleviated the impact. In 2014, even though average selling price of BRR’s sugar fell by 7% from 2013, its operating margin before depreciation and amortization improved to 12.1% in 2014 from 10.1% in 2013. Higher volume of crushed cane and lower cane cost per unit reduced the production cost. The increasing revenues from power also helped boost the profit. As a result, BRR’s earnings before interest, tax, depreciation and amortization (EBITDA) increased to Bt487 million in 2014 from Bt433 million in 2013.
BRR’s financial leverage was high. However, the capital structure improved after it received new capital from the initial public offering (IPO) in late 2014. The debt to capitalization ratio improved from 79.7% in 2012 to 58.8% in 2014. The fund from operation (FFO) to total debt ratio declined to 11.95% in 2014 from 21.15% in 2012 due to the falling sugar prices and rising borrowings from hefty expansion. EBITDA interest coverage ratio also contracted to 4.2 times in 2014 from 5.97 times in 2011.
During 2015-2017, BRR’s capital expenditures will be set at Bt1,500 million. BRR’s expenditures will be mainly for expansion in cane crushing capacity and its third power plant. With expected total EBITDA of approximately Bt450-Bt550 million per year and planned investments, the company’s leverage is expected to remain high over the next few years.
Sugar industry remains under pressure because of low sugar price. Raw sugar prices worldwide continued to plunge in 2015, sliding by 12% to 14.37 cents per pound during the first four months of 2015, compared with an average price of 16.34 cents per pound in 2014. The abundant sugar inventories worldwide kept the pressure on sugar prices. In addition, the value of Brazilian real has depreciated significantly against the US dollar. Brazil is the largest exporter of sugar worldwide.
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