TRIS Rating has affirmed the company rating of Sub Sri Thai PLC (SST) at “BBB-” with “stable” outlook. SST’s credit rating reflects the growth prospects of its restaurant and quick service restaurant (QSR) segment along with stable track record in the warehouse and document storage business. These strengths are offset by SST's weak profitability and intense competition in the restaurant and QSR industry amid the economic slowdown and sluggish consumer spending.
The “stable” outlook reflects TRIS Rating's expectation that SST’s business and financial profile will continue to improve, supported by growing cash flows from operation. SST's credit upside is limited over the next 12-18 months taking into account the current financial profile. SST's credit profile could be negatively impacted if its profitability continues to deteriorate or if the company makes aggressive debt-funded investments.
SST was established in 1976 and was listed on the Stock Exchange of Thailand (SET) in 1994. As of March 2016, the Sukhanindr family and affiliates held 67.6% of SST’s total shares. The company initially operated warehouses and wharfs in Samutprakarn province and expanded its line of business to include document storage services. SST expanded into the soybean and vegetable oil business in 2010 but divested the business in September 2014. In 2012, SST expanded into the restaurant and QSR segment by acquiring the Mudman Group (Mudman), the country’s master franchisee of “Dunkin’ Donuts”, “Au Bon Pain", and “Baskin Robbins”. In July 2014, SST, through Mudman, acquired the Greyhound Group including Greyhound Co., Ltd. (GH) and Greyhound Cafe Co., Ltd. (GHC), adding SST's and Mudman's first self-owned restaurant brand. Currently, SST operates three lines of business: restaurant and QSR, fashion and lifestyle, and warehouse. The restaurant and QSR segment was the main revenue contributor, providing over 80% of total revenue and 90% of earnings before interest, tax, depreciation and amortization (EBITDA) in 2015.
SST's business profile hinges on the performance of the restaurant and QSR segment which is highly competitive and relies largely on the domestic economy. In 2015, SST reported total revenue of Bt3,073 million, a 25% increase from Bt2,455 million in 2014. A jump in revenue was due mainly to the full-year consolidation of the Greyhound Group and outlet expansion. In conjunction with the industry, the slowdown in domestic economy resulted in a negative same-store-sales growth in 2015. For the first three months of 2016, SST's revenue grew by 6% year-on-year (y-o-y) to Bt789 million. SST's profitability remained soft. The operating margin (operating income before depreciation and amortization, as a percentage of sales) dropped to 8.5% in 2015, compared with 10.6% in 2014. The drop was due to a material rise in selling and administrative (SG&A) expenses arising from termination of some underperformed restaurant and QSR projects and exploring new business opportunities. The operating margin improved to 11.5% for the first three months of 2016. The high SG&A level is a negative credit factor.
SST's leverage rose during the past 15 months due mainly to the weakened operating performance. The debt-to-capitalization ratio rose to 51.6% as of March 2016, compared with 48.3% in 2014. SST's liquidity profile remained below average. The EBITDA interest coverage ratio stood at 2.1 times and the ratio of funds from operations (FFO) to total debt was 6.9% (annualized with the trailing 12 months) for the first quarter of 2016.
The slowdown in domestic economy and consumption is expected to continue in 2016. TRIS Rating expects SST’s revenue growth will be driven mainly by an outlet expansion rather than same-store-sales growth in 2016. The same-store-sale growth is expected to gradually recover in 2017-2018. TRIS Rating's base-case projects SST's revenue to grow by 3%-10% per annum during 2016-2018. The company is expected to efficiently manage its SG&A and improve its profit margin to the mid-teens level. SST also plans to expand GHC abroad through franchising. Franchising fees will help improve SST's overall profit margin, as it carries little additional extra cost.
TRIS Rating expects SST’s capital structure and liquidity profile to improve. The company plans to list its subsidiary, Mudman, on the Market for Alternative Investment (MAI) in 2016. The proceeds from Mudman's initial public offering (IPO) will be used to repay part of its debt and expand its food business. Under TRIS Rating's base-case scenario, SST is expected to generate EBITDA of Bt370-Bt570 million per annum from 2016-2018. The proceeds from Mudman's IPO and operating cash flows will support SST's funding use plan. From 2016-2018, SST plans to spend Bt200-Bt350 million per annum in capital. Its financial obligation is approximately Bt200-Bt300 million per annum during the period. TRIS Rating expects SST's ratio of FFO to total debt to stay between 12%-22% during 2016-2018 while the EBITDA interest coverage ratio will stay above 3 times over the same period. The ratio of debt to capitalization is expected to stay below 50% from 2016-2018.
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