TRIS Rating has assigned the company rating of Seafresh Industry PLC (CFRESH) at “BBB” with “stable” outlook. The rating reflects the market position as a medium-scale shrimp processor, the company’s long track record in shrimp processing industry in Thailand, moderate diversity of its markets and production base. The rating also incorporates the company‘s strategy to comply with the highest standards of food safety and traceability along the whole supply chain. The strengths are partially offset by company’s heavy reliance on the shrimp product, inherent volatility and competitive environment of shrimp industry, the industry’s exposure to the disease outbreaks, and changes in the regulatory frameworks regarding trade barriers.
The “stable” outlook reflects TRIS Rating’s expectation that CFRESH will maintain its competitiveness and market position in the shrimp industry. The gradual recovery from EMS in Thailand would help increase shrimp supply and keep price falling. CFRESH’s credit upsides may happen if the company improves cash flow generation significantly on the sustainable basis. The downside risk could occur if its profitability noticeably deteriorates or its performance weakens on extended period. Any debt funded expansion, which will deteriorate balance sheet and weaken cash flow protection, is also a negative factor for CFRESH’s credit rating.
CFRESH is medium-sized shrimp’s processor and exporter in Thailand. It was established in Thailand in 1982 by the Chia-apar family. The company was listed on the Stock Exchange of Thailand (SET) in August 1993. As of March 2016, the Chia-apar family held 66.1% of the company’s shares. CFRESH has expanded its businesses abroad by acquiring shrimp processing company in the United Kingdom (UK) in 2011 and jointly investing in a fully integrated shrimp operation in Belize, Central America in 2012. CFRESH’s main products comprise frozen raw shrimp, cooked shrimp, and value added shrimp products. In 2015, value added products contributed nearly 60% of total revenues, frozen raw and cooked shrimp contributed about 15% each, and the remaining 10% came from other seafood products. CFRESH is fairly diversified in terms of production base and market despite a concentration in shrimp products. The company owns and operates two shrimp processing plants, with a total capacity of 30,000 tonnes per year. One plant is located in Chumphon province, Thailand, while the second plant is in Worcestershire, UK. In terms of market, the European Union (EU) was the company’s largest market, accounting for 69%-78%, followed by Japan (12%-14%), and North America (6%-13%) during 2013-2015. CFRESH’s production and supply chain has been certified by various international organizations for its food safety, traceability, and environmental management standards. Having complied with international standards of food safety and supply chain help CFRESH’s products qualified for leading retailers worldwide. CFRESH carries some customer concentration risk because its major revenue comes from limited number of customers.
CFRESH’s financial performance for 2013 was hard hit by an early mortality syndrome (EMS) in shrimp business in Thailand. EMS has cut the shrimp supply in Thailand by half and pushed the shrimp price up by more than 50%. The spike in raw material cost caused CFRESH to have a loss in earnings before interest tax depreciation and amortization (EBITDA) at Bt140 million in 2013, compared with EBITDA of Bt530 million achieved in 2012. In 2014-2015, shrimp industry in Thailand was still encompassed by EMS problems. Shrimp supply in Thailand remained low, about 40% of normal level. However, CFRESH’s financial performance recovered during 2014-2015, partly supported by overseas operations. Shrimp disease outbreak as well as the termination of import tax privileges under Generalized Scheme of Preferences (GSP) granted by the EU to Thailand cut sales volume of Thai operation by 18% year-on-year (y-o-y) in 2014 and 25% y-o-y in 2015. The decrease was partly offset by the increase in the UK operation, which has alternatively sourced from other shrimp exporting countries. As a result, CFRESH's shrimp sales volume dropped by 10% y-o-y in 2014 and 9% y-o-y in 2015. At the same time, CFRESH has sold more value-added products and re-priced new contracts to reflect new shrimp cost. CFRESH’s operating margin before depreciation and amortization recovered to 7.2%-8.4% during 2014-2015, from negative operating margin of 3.1% in 2013 and 3.4%-8.2% in 2010-2012. Even though the shrimp operation in UK and Thailand recovered noticeably, the shrimp operation at joint venture (JV) in Belize was below expectation. It contributed equity loss of Bt100 million in 2015. Including equity loss from JV, CFRESH’s EBITDA improved to Bt661 million in 2014 and Bt625 million in 2015, compared with EBITDA loss of Bt140 million in 2013.
CFRESH’s balance sheet is moderate. Expansion to overseas gradually drove CFRESH’s total debt to capitalization higher from the debt-free position in 2010. The total debt to capitalization ratio jumped to 56.1% in 2013, from 27.8% in 2012. This came after the company encountered the disease outbreak in 2013 and had ongoing capital spending. The debt to capitalization ratio improved to 50.5% in 2015 along with the recovery of the operations. The funds from operations (FFO) to total debt ratio ranged about 30.3%-33.0% in 2014-2015 from the negative FFO in 2013. EBITDA interest coverage ratio stood at 11.0 times in 2014 and 9.8 times in 2015.
After the EU gave the warning or yellow card to Thailand in April 2015, the EU is considering whether Thailand meets the conditions for IUU Fishing (Illegal, Unreported and Unregulated Fishing), an EU framework which is aimed at preventing illegal, unreported, and unregulated fishing. If Thailand does not make a significant progress to resolve the problems, the EU will ban all fishery products from Thailand. Shrimp’s products in Thailand are mostly farmed shrimp, but farmers use fishmeal from fishing vessels as one of feed component. If the EU bans fishery products and shrimp imports from Thailand, shrimp exports to the EU would plunge. The impact to CFRESH is expected to be manageable as it has production base in the UK to help alleviate the effect.
CFRESH’s EBITDA is anticipated to be approximately Bt600-Bt750 million per year during 2016-2018 under a base case scenario. CFRESH’s capital expenditures will be set at Bt150-Bt250 million per year during the same period. CFRESH’s expenditures will be mainly used for the expansion of shrimp farming and the maintenance capital expenditure (CAPEX). With expected EBITDA and planned investments, the company’s leverage is expected to gradually improve, but remain moderate over the next few years. FFO to total debt is forecasted to be 30%-40% and EBITDA interest will hover around 8-12 times in 2016-2018.
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