TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt3,000 million in senior unsecured debentures of Betagro PLC (BTG). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of BTG at “A”. The outlook remains “stable”. The proceeds from the new debentures will be used for planned capital expenditures.
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 partially weigh down by the inherent cyclicality of the commodity-type products BTG sells, the volatile prices for major raw material, the exposure to disease outbreaks, and changes in the regulations and tariffs of importing countries.
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 December 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 2015, revenue from feed comprised 35% of BTG’s total sales, followed by poultry (34%) and swine (20%). Domestic sales accounted for 88% of total sales, with the remaining 12% from export sales.
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. In 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 2015, the company had 143 stores in Thailand and three stores in overseas.
BTG reported a high profit in 2014, but its operating result plunged in 2015 on the back of oversupply conditions in the livestock industry in Thailand. Significant drops in livestock prices cut BTG’s operating margin. The operating margin before depreciation and amortization weakened from a high of 8.3% in 2014 to 4.1% in 2015. BTG’s earnings before interest, tax, depreciation, and amortization (EBITDA) was Bt3,954 million in 2015, slashing by 45.9% from Bt7,307 million in 2014, even though total revenues rose by 1.1% y-o-y to Bt83,450 million in 2015.
Owing to the recent decline in profitability, BTG’s balance sheet weakened, but remains satisfactory. The total debt to capitalization ratio increased from 39.7% in 2014 to 44.5% in 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 61.8% in 2014 to 30.3% in 2015. The EBITDA interest coverage ratio was 10.4 times in 2015, compared with 18.2 times in 2014.
Looking forward, BTG’s operating performance is expected to improve in 2016 as swine prices rebound and feed costs declines. During the first quarter of 2016, the average swine price increased by 9% y-o-y, while the average prices of corn and soybean meal declined by 6% y-o-y and 10% y-o-y, respectively. Demand for poultry in export markets is expected to remain strong. Moreover, the import restriction on poultry parent stock following the recent avian influenza outbreak in major exporting countries would lift the price of poultry in late 2016.
During 2016-2018, BTG plans capital expenditures of about Bt11,000 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. As a result, the total debt to capitalization ratio is expected to remain moderate over the next few years.
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