TRIS Rating has assigned a rating of “BBB” to the proposed issue of up to Bt500 million in senior unsecured debentures of Seafresh Industry PLC (CFRESH). At the same time, TRIS Rating has affirmed the company rating of CFRESH at “BBB”. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance existing debt. The ratings reflect the market position as a medium-scale shrimp processor, the company’s long track record in shrimp processing industry in Thailand, and moderate diversity of its markets and production base. The ratings also incorporate 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, exposure to the foreign exchange rate risk, 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 an early mortality syndrome (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 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 abroad by acquiring a 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 bases and markets 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 markets, 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 a number of 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.
For the first three months of 2016, CFRESH’s performance softened, compared with the same period of the prior year. Total revenue declined by 9% year-on-year (y-o-y). The slide was mainly due to a 10% y-o-y drop in the sales volume of shrimp despite a 2% y-o-y rise in the average price of shrimp products. The operating margin improved to 7.9% during the first quarter of 2016, compared with 6.4% over the same period of the prior year. The lower shrimp cost per unit drove operating profit margin of the company. The depreciation of the British pound sterling against the Thai baht was attributed to softening in the company’s operation during the first three months of 2016. CFRESH reported a loss on foreign currency translation of Bt69 million. However, CFRESH’s earnings before interest, tax, depreciation, and amortization (EBITDA) for the first three months of 2016 improved to Bt135 million, up from Bt112 million for the first quarter of 2015. The company’s performance is expected to improve gradually during the second quarter of 2016, propelled by higher sales volumes in the EU nations and other markets, as well as the appreciation of the British pound sterling against the Thai baht.
CFRESH’s balance sheet is moderate. The total debt to capitalization ratio improved to 45.6% at the end of March 2016, from 50.5% at the end of December 2015. The improvement came from the lower working capital needs. EBITDA interest coverage ratio declined to 6.9 times, but it remained acceptable for the first three months of 2016.
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 forecasted at Bt600-Bt750 million per year during 2016-2018 under the base case scenario. CFRESH’s capital expenditures will be ranged from Bt150-Bt250 million per year during the same period. CFRESH’s expenditures will be mainly used for the expansion of shrimp farming and maintenance. Given the forecasted EBITDA and planned capital expenditures, the company’s leverage is expected to gradually improve over the next few years. The funds from operations (FFO) to total debt is forecasted to range from 30%-40% and the EBITDA interest coverage ratio will hover around 8-12 times in 2016-2018.
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