TRIS Rating has affirmed the company and current senior unsecured debenture ratings of Betagro PLC (BTG) at “A” with “stable” outlook. The ratings reflect the company’s proven record in the Thai agribusiness and food industries, the fully vertical integration across its diverse product lines, and its focus on value-added and branded products. The ratings take into consideration the inherent cyclicality of the commodity-type products BTG sells and the volatile prices for grains, the major raw material. The exposure to disease outbreaks, changes in the regulations and tariffs of importing countries remain rating concerns.
The “stable” outlook reflects TRIS Rating’s view that BTG will be able to maintain its leading positions in the Thai agribusiness and food industries. The company’s strategy to focus on value-added and branded products should partially offset the cyclical nature of commodity-like farm products.
BTG’s ratings and/or outlook would be revised upward if BTG’s cash flow generation improves on sustainable basis while capital structure does not deteriorate from current level during its expansion. In contrast, the ratings and/or outlook could be revised downward if more intense competition leads to persistent declines in BTG’s revenues and profitability.
BTG was incorporated in 1967 by the Taepaisitphongse family and its associates. The company is one of the leading agribusiness and food companies in Thailand. As of June 2015, the Taepaisitphongse family held directly 14.33% of the company’s shares and indirectly a 69.45% share through Betagro Holding Co., Ltd., BTG’s parent company. BTG’s business is divided into six segments comprising feed, poultry, food, swine and regional, animal health and technology, and foreign integration. In 2014, revenue from poultry products comprised 35% of BTG’s total sales, followed by feed (34%) and swine (21%). Domestic sales accounted for 88% of total sales, with the remaining 12% from export sales.
Since its first joint venture with a Japanese company in 1980, BTG has continued to expand through joint ventures, mostly with Japanese partners. Apart from serving as channels for exports, the ventures provide BTG with the opportunity to improve its operations and the opportunity for technology transfers, especially the Specific Pathogen Free (SPF) technique for swine farming. With the types of collaborative efforts found in its joint ventures, BTG has become an industry-leading producer of high-quality pork meat in Thailand. The company’s chicken and swine operations are fully vertically integrated, from feed to food products. Fully-integrated operations help BTG’s products meet food safety and traceability standards. BTG’s main export markets are Japan and the countries of the European Union (EU). The products exported to Japan are mostly distributed via its partners.
To overcome the cyclical nature of the industry and the commodity-like nature of the products, BTG is creating value-added products and building its own brands. During the first half of 2015, BTG’s value-added food products and branded meat products comprised 12% and 14% of total sales, respectively. However, BTG has set ambitious sales targets for its value-added and branded products to reach 18% and 24% of total sales by 2020, respectively. If the target is achieved, the profit margin would be more stabilized. BTG also created its own domestic distribution channel, “Betagro shops”, to serve industrial food processors and food service companies. At the end of June 2015, the company had 126 stores in Thailand and 2 stores in overseas.
In 2014, BTG posted a strong financial performance on the back of favorable prices for livestock. BTG’s total revenues increased by 12% year-on-year (y-o-y) to Bt83,449 million in 2014. The improvement was attributed to rising sales of BTG’s pork products and strong demand for poultry products from the EU countries. The operating profit margin before depreciation and amortization improved from 6.6% in 2013 to 8.4% in 2014. Earnings before interest, tax, depreciation, and amortization (EBITDA) improved significantly, climbing from Bt5,320 million in 2013 to Bt7,396 million in 2014.
The attractive prices of poultry during 2013 through early 2014 induced capacity expansion in the industry. Moreover, Saha Farm Co., Ltd., one of the largest poultry producers, resumed operations after the company closed its factories in 2013. As a result, the supply of livestock increased nationwide and poultry prices slumped during the first half of 2015. According to the Thai Feed Mill Association, the average price of poultry declined by 13% y-o-y to Bt35.7 per kilogram (kg) during the first six months of 2015. During the same period, the average price of swine dropped by 19% y-o-y to Bt60.4 kg. because of oversupply situation. Like other livestock companies, the drops in the prices of livestock products, both poultry and swine squeezed BTG’s operating margin. The operating profit margin before depreciation and amortization fell from 9.9% in the first half of 2014 to 3% in the first half of 2015. EBITDA also fell to Bt1,583 million for the first six months of 2015, from Bt4,270 million during the same period of a year earlier, even though total revenues rose by 3% y-o-y to Bt40,639 million.
With the recent deterioration in profitability, BTG’s balance sheet slightly deteriorated. Total debt increased from Bt9,387 million at the end of 2014 to Bt13,571 million as of June 2015. The total debt to capitalization ratio increased from a low of 39.8% in 2014 to 49.9% at the end of June 2015. BTG’s liquidity profile remains good even though it was hurt by lower livestock product prices. The ratio of funds from operations (FFO) to total debt decreased from 62.6% in 2014 to 32.4% (annualized, from the trailing 12 months) for the first half of 2015. The EBITDA interest coverage ratio was 8.4 times during the first six months of 2015, compared with 17.7 times in 2014.
Looking forward, BTG’s operating performance is expected to improve for the remainder of the year as swine prices recover and feed costs get under control. Demand for poultry in export markets is expected to remain strong supported by the lifting of the import ban on Thai frozen chicken meat from several countries and the recent depreciation of the Thai baht. In addition, the avian influenza outbreak in major exporting countries caused Thailand to restrict import on poultry parent stock.
During 2015-2018, BTG plans capital expenditures of about Bt12,800 million. The expansion plans include new farms, new feed and food processing plants. BTG can fund most of the capital expenditures with operating cash flow, given EBITDA of Bt5,000-Bt6,000 million per annum during a normal year. As a result, the total debt to capitalization ratio is expected to remain moderate over the next few years.
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