TRIS Rating has affirmed the company rating and the senior unsecured debenture ratings of Mitr Phol Sugar Corporation Ltd. (MPSC) at “A+” with “stable” outlook. The “A+” ratings reflect the company’s leading market position in the sugar industry in the Asia Pacific region, its moderate geographic diversification, well-accepted brand name, efficient sugar mill operations, and its diversified sources of income. The ratings are partially weighed down by the cyclicality of sugar prices and volatility of sugarcane as well as the regulatory risks abroad.
The “stable” outlook reflects TRIS Rating’s expectation that MPSC will maintain its leading position in both Thai and Chinese sugar industries. MPSC’s diversified sources of income will help the company weather the industry’s downturn. The downside factor for MPSC’s rating is the substantial drop in sugar prices, which results in falling profitability. Any large, debt-funded investment that would weaken the debt to capitalization ratio for an extended period would also be a negative factor for MPSC’s credit ratings. The credit upside for MPSC’s ratings is unlikely in the near term as the sugar prices remain fragile.
MPSC was established in 1946 by the Vongkusolkit family. The Vongkusolkit family collectively holds 100% of the company’s shares through Mid-Siam Sugar Co., Ltd. MPSC owns and operates sugar mills in Thailand, China, Lao People's Democratic Republic (Lao PDR), and Australia. For the 2014/2015 growing season, MPSC produced 3.97 million tonnes of sugar across all its locations.
MPSC has long been the leader in the Thai sugar and sugarcane industry. In the 2014/2015 growing season, MPSC’s six sugar mills in Thailand produced 2.3 million tonnes of sugar, earning MPSC the highest market share (20.4%), based on production volume. In China, MPSC owns and operates six sugar mills, which produced 1.06 million tonnes of sugar in the 2014/2015 season. The company remains the second-largest sugar producer in China, with an 8.7% market share. MPSC’s sugar mill in the Lao PDR and Australia produced 0.7 million tonnes totally. Apart from producing sugar, MPSC has expanded along the sugar value-added chain to maximize the utilization of sugarcane and other supporting businesses. MPSC’s related businesses include electricity generation, ethanol production, production of wood-substitute material, and logistics.
In 2014, MPSC’s total sales were Bt89,378 million. The sugar segment accounted for 80% of MPSC’s revenues. Sugar production in Thailand comprised 44% of total revenues while sugar production in China made up 29%. The operations in the Lao PDR and Australia contributed 7% of total revenues. The power and ethanol segments contributed 15% of total revenues.
MPSC’s performance in the first nine months of 2015 benefited from business diversification amidst the tumbling sugar prices worldwide. Even though its sugar operation in Thailand was hurt by the 12.9% fall in average selling price of sugar, the impact was offset by the improvement in sugar business in China and wood substitute material and paper unit as well as the healthy ethanol and power businesses. MPSC’s ratio of operating income before depreciation and amortization to sales, including gains from its future contracts, improved to 18.6% in the first nine months of 2015, compared with 15.8% over the same period of the prior year (y-o-y). The sugar business in China improved significantly because the cost of cane lowered by 9% following a government announcement. On top of lower cane cost, the sugar price recovered noticeably as sugar production nationwide dropped more than 10% on the back of lesser plantation areas and unfavorable weather. The domestic sugar prices in China increased by 31.8% y-o-y. The power and ethanol businesses in Thailand continued to be healthy, underpinned by government support for alternative fuel. The substitute material unit reported stronger margin due to low costs of raw material. Earnings before interest, tax, depreciation, and amortization (EBITDA) grew by 8.3% y-o-y to Bt14,216 million in the first nine months of 2015. The funds from operations (FFO) were flat at Bt11,410 million in the period. MPSC recorded foreign exchange loss of Bt775 million, but it was mostly made up by compensation from the Cane and Sugar Fund. The final cane price is estimated to be lower than the initial cane price in the 2014/2015 crop year. According to Cane and Sugar Act, if the final cane price is lower than the initial price, the Cane and Sugar Fund has to pay for the difference to the millers as part of the revenue sharing scheme while the cane growers do not have to return the difference between the final cane price and initial cane price. This compensation added Bt665 million to MPSC’s other income. MPSC’s EBITDA interest coverage ratio was satisfactory at 7.5 times during the current down cycle of the industry. FFO to total debt ratio remained adequate at 19.1% in 2014 and 22.0% (annualized from the trailing 12 months) in the first nine months of 2015. MPSC’s financial leverage is moderate. The total debt to capitalization ratio hovered around 48%-51% at the end of 2012 through September 2015.
The raw sugar prices worldwide rebounded from 12 cents per pound during the fourth quarter of 2015 to 13-15 cents per pound during the beginning of 2016. The recovery in sugar prices were in part driven by poor weather which was projected to cut sugar production of major sugar-producing countries, including Thailand, India and China, in the 2015/2016 crop year. As a result, 2015/2016 will be the first year of global sugar deficit in six years. However, the continued recovery of sugar price remains uncertain. It is under pressure from the uncertainty of economic recovery worldwide, and depreciation of the Brazilian real as well as the projected higher sugar production in Brazil, the major export country. MPSC’s EBITDA is forecasted to be approximately Bt15,000 million per year under the base case scenario. MPSC has maintenance capital expenditure at around Bt5,000 million per year. In addition, MPSC has been approved to increase crushing capacity totaling 84,000 tonnes of cane per day. The investment cost is projected around Bt20,000 million, which will be spanned over many years. As a result, the FFO to total debt is expected to remain in the range of 20%-25% and EBITDA interest coverage will hover around 6-7 times.
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