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 and 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 NR demand slowdown from weak global economic condition which may cause NR prices weak for an extended period 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 strong balance sheet to withstand the down cycle of the NR industry.
STA’s credit upside is limited as long as rubber prices remain low. The downside risk could occur if rubber prices continue to slump, leading to noticeably weakening debt serviceability for the sustainable period. An aggressive debt-funded investment is also the negative factor for STA’s credit ratings.
STA is one of the world’s leading processors and merchandisers of NR. Currently, the company has 26 processing plants located in Thailand, three plants in Indonesia, and one in Myanmar. As of 30 September 2015, the company’s total processing capacity was 1,467,544 tonnes per year. The company’s market share in the global NR industry in the first half of 2015 was 8.8%. Approximately 80% of its products are sold directly to end-users, which are mostly tyre manufacturers. Exports accounted for 84% of STA’s total sales volume for the first nine months of 2015. China was the largest export market, accounting for 51% of export volume.
Currently, the major NR producing nations are Thailand, Indonesia, Vietnam, and Malaysia. In the first six months of 2015, these four countries accounted for 79% of the 5.6 million tonnes of NR produced worldwide. Thailand was the largest producer, with a total production volume of 2.01 million tonnes, followed by Indonesia (1.62 million tonnes), Vietnam (0.41 million), and Malaysia (0.35 million tonnes). In terms of consumption, demand for NR worldwide has increased steadily over 2011-2014, climbing from 10.79 million tonnes in 2010 to 12.16 million tonnes in 2014. It grew at an average of 3.0% per annum. China consumes around 39.2% of the amount of NR produced worldwide. Worldwide NR consumption slightly rose by 1.4% in the first half of 2015 on the back of global economic slowdown and tumbling crude oil prices. International Rubber Study Group (IRSG) has projected that NR production will exceed demand by 303,000 tonnes in 2015.
Raw material costs account for 94%-98% of the rubber processing costs for a NR producer. Processors, including STA, are thus exposed to volatile NR prices, and as a result, earnings and cash flow fluctuate significantly. The company’s operating margin before depreciation (excluding a reversal on the diminution in value of inventories) hovered between 0.64%-3.79% in 2010-2014. Earnings before interest, tax, depreciation, and amortization (EBITDA) ranged between Bt1,490-Bt4,945 million during the same period.
For the first nine months of 2015, the company’s total revenue declined to Bt45,825 million, a 21% year-on-year (y-o-y) drop. The drop was mainly due to a 16.4% decline in NR prices and a 7.1% drop in STA’s NR shipments. STA shipped 817,004 tonnes of NR to its customers for the first nine months of 2015. The drop in shipments came from a 7.0% declines in export, especially to China. Export to China, which accounts for 51.0% of total export volume, declined 15.8% y-o-y in the first nine months of 2015. STA’s average selling price for the first nine months of 2015 dropped by 16.4% y-o-y in line with the NR prices worldwide. This was because worldwide demand for NR grew at a slower rate, merely 1.4% y-o-y in the first six months of 2015, amidst global economic uncertainty. Despite a drop in prices of rubber products, the company’s operating margin before depreciation jumped to 3.28%, compared with 0.64% in the first nine months of 2014. The stronger operating margin was driven by the effective inventory management. The robust operating margin pushed up EBITDA to Bt2,719 million in the first nine months of 2015, a 47.8% y-o-y rise.
STA’s balance sheet was relatively moderate. Total debt rose to Bt19,799 million as of September 2015, from Bt13,975 million as of December 2014. The total debt to capitalization ratio increased to 48.11% at the end of September 2015, from 40.43% at the end of 2014. The higher level of STA’s total debt came mainly from a rise in working capital. The cash flow protection remained acceptable during the down cycle. EBITDA interest coverage ratio was 3. 35 times in the first nine months of 2015, compared with 3.62-3.72 times in 2013-2014. The fund from operation (FFO) to total debt ratio declined to 10.66% (annualized with trailing 12 months) in the first nine months of 2015, compared with 14.07%-16.46% in 2013-2014.
During 2016-2018, STA’s plans to spend Bt1,000-Bt1,500 million per annum in capital expenditures, primarily to build rubber processing plants in Thailand and abroad. STA’s EBITDA is expected to be around Bt2,500-Bt2,900 million per year. TRIS Rating expects that STA’s capital expenditures can be financed mainly by its operating cash flow.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2015, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.