TRIS Rating has assigned a rating of “BB+” to the proposed issue of up to Bt1,200 million in senior unsecured debentures of Buriam Sugar PLC (BRR). At the same time, TRIS Rating has affirmed the company rating of BRR at “BBB-” with “stable” outlook. The “BB+” rating assigned to the senior unsecured debentures is one-notch below the company rating. This is to reflect structural subordination of the proposed debentures, compared to existing debts. The ratio of secured debt to total consolidated assets is more than 20%, TRIS Rating’s notch down threshold.
The “BBB-”company rating reflects the company’s 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 reliable income 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% on sustainable basis.
BRR’s credit upsides may happen if the company has more reliable 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.
BRR’s financial performances softened following the drop in sugar prices, similar to all sugar millers. BRR’s total sales grew during 2014 through the first half of 2015 despite the falling sugar prices. This was due to the increasing volume of sugar production. For the first six months of 2015, total sales grew by 7% over the same period in 2014, climbing to Bt2,699 million. However, 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. For the first six months of 2015, BRR’s operating margin before depreciation and amortization improved to 17.5%, compared with 9.0% over the same period of the prior year. The higher volume of sugar production and lower cane cost per unit drove operating profit margin. More contribution from high margin power segment also helped boost the profit margin. Revenues from power sales tripled to Bt287 million in the first half of 2015. As a result, BRR’s earnings before interest, tax, depreciation, and amortization (EBITDA) increased to Bt496 million for the first six months of 2015, up from Bt239 million for the first six months of 2014.
BRR’s financial leverage was relatively high. 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. For the first six months of 2015, the debt to capitalization ratio remained high at 61.7% from higher inventory level after crushing period. The fund from operation (FFO) to total debt ratio improved to 13.18% for the first six months of 2015 from 11.95% in 2014 due to the improving operating margin. EBITDA interest coverage ratio also rose to 5.8 times for the first six months of 2015 from 4.2 times in 2014.
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 24% to 12.8 cents per pound during the first eight months of 2015, compared with an average price of 16.8 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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