TRIS Rating has affirmed the company rating and the ratings of the senior unsecured debentures of Khon Kaen Sugar Industry PLC (KSL) at “A” with “stable” outlook. The ratings reflect the company’s long track record in the sugar and sugarcane industry, as one of the leading sugar producers in Thailand and its diversification into sugar-related businesses. The ratings also take into consideration the ongoing worldwide slump in sugar prices, the operational risks of KSL’s sugar operations in the Lao People’s Democratic Republic (Lao PDR) and Cambodia, as well as the volatility of the supply of sugarcane.
The “stable” outlook reflects TRIS Rating’s expectation that KSL will maintain its competitive position in the Thai sugar industry. The revenue sharing system of the Thai sugar industry, strong demand for ethanol, and reliable income from the energy segment will be cushions for the company during the down cycle of the sugar industry.
KSL’s credit upside is limited as long as sugar prices remain low. The downside risk could occur if sugar prices continue to slump, leading to noticeably weakening profitability for the extended periods. An aggressive debt-funded investment and weak persistent cash flow protection are also the negative factor for KSL’s credit ratings.
KSL is one of the leading sugar producers in Thailand, established in 1945 by the Chinthammit family and associates. As of April 2015, the Chinthammit family collectively held 70.3% of the company’s shares. The company owns and operates five sugar plants in Thailand, with a combined cane crushing capacity of 110,000 cane tonnes per day as of May 2015. KSL Group has procured 8.8 million tonnes of sugarcane in the 2014/2015 crushing period and produced 914,458 tonnes of sugar. KSL’s sugar production in the 2014/2015 growing season was ranked fourth with a market share of 8.3%, trailing the Mitr Phol Group (19.5%), the Thai Roong Ruang Group (14.3%), and the Thai Ekkalak Group (9.2%).
Since fiscal year (FY) 2006, KSL has expanded along the sugar value chain to maximize the utilization of sugarcane. KSL’s sugar-related businesses include electricity generating and ethanol producing. During FY2013 and FY2014, revenue from the energy segment (electricity and ethanol) accounted for 18% of total sales.
Apart from producing sugar in Thailand, KSL also operates sugar plants in the Lao PDR and Cambodia. The plants in the Lao PDR and Cambodia started commercial production in FY2010. Total investment cost in the Lao PDR and Cambodia was approximately Bt5,200 million. Sugar production in the Lao PDR and Cambodia are currently small, compared with sugar operation in Thailand. Since starting up, the sugarcane yield in the Lao PDR has improved gradually, but the sugarcane yield in Cambodia has remained below the plan. As a result, the sugar production in both countries for the 2014/2015 growing season was only 35,000 tonnes, representing less than 5% of KSL’s sugar production in Thailand. In addition, the sharp fall in sugar price further pushed down KSL’s operations in the Lao PDR and Cambodia in FY2015. KSL’s operations in the Lao PDR and Cambodia have continued to report losses. The combined loss totaled Bt175 million for the first half of FY2015.
Due to declining trend of sugar price worldwide, KSL’s financial performance for FY2014 was moderate. KSL’s revenue slightly rose by 1% to Bt19,185 million in FY2014, from Bt18,941 million in FY2013. KSL’s gross margin improved from 21% in FY2013 to 24.7% in FY2014. Falling production cost of sugar from higher cane crushing yield and the depreciation of Thai baht against the US dollar lifted up gross margin for sugar business, even though average selling price of raw sugar declined by 6% in FY2014. The company’s margin was partly supported by strong margin of energy-related segment. In FY2014, strong ethanol’s consumption in Thailand lifted the reference price of ethanol by 7.1% to Bt27.22 per liter in FY2014. Gross margin of ethanol and power segments remained healthy at 26% and 48%, respectively in FY2014. KSL’s earnings before interest, tax, depreciation and amortization (EBITDA) increased to Bt3,816 million in 2014, from Bt3,382 million in 2013 due to higher margin. For the first six months of FY2015, KSL’s total revenues grew by 6% to Bt7,906 million over the same period of FY2014. This was mainly due to a 13% rise in sales volume of sugar business. KSL’s EBITDA during the first six months of FY2015 slightly declined to Bt2,204 million, from Bt2,243 million over the same period of FY2014. Even though average selling price of KSL’s export sugar fell by 16% over the same period of the prior year, more mix of domestic sugar sales and healthy earnings from energy segment held up KSL’s EBITDA in the first six months of FY2015.
KSL’s financial leverage was relatively high with a debt to capitalization ratio of 59.8% at the end of FY2014. The EBITDA interest coverage ratio was acceptable at 4.7 times in FY2014, down from 5.4-8.4 times in FY2011-FY2013. The fund from operation (FFO) to total debt ratio was at 13.4% in FY2014, compared with a range of 13.6%-25% in FY2011-FY2014. Looking forward, KSL’s capital expenditures for FY2015-FY2016 will be lower at Bt1,000 million per year, from Bt3,000-Bt6,000 million per year in FY2013-FY2014 due to no major capacity expansion. With expected KSL’s total EBITDA of approximately Bt3,000 million per year and planned investments, the company’s leverage is expected to improve gradually. The cash flow protection is expected to be cyclically low in FY2015 on the back of falling sugar price; however, it will be improved in the medium terms, following the recovery in sugar prices and declining debt level.
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