TRIS Rating has affirmed the company rating of Buriram Sugar PLC (BRR) at “BBB-” and has affirmed the senior unsecured debenture rating of BRR at “BB+” with “stable” outlook. The ratings reflect the company’s long track record in the sugar and sugarcane industry, its high crushing yield, protection under the revenue sharing scheme in the sugar industry in Thailand, and its expansion to power business, which provides some reliable income streams to the company. The strengths are partially offset by small-scale sugar production, its single sugar mill, the volatility of sugarcane supply, and the company’s relatively high leverage.
The “stable” outlook reflects TRIS Rating’s expectation that BRR will maintain its position in the sugar industry in Thailand. The revenue sharing system of the sugar industry and increasing incomes from the power business will improve stability to the company’s earning.
BRR’s credit upsides may happen if the company has more reliable streams of cash flow from the power business to alleviate the fluctuation of sugar price. A total debt to capitalization ratio below 60% and rising cash flow protection for a sustainable period are also positive factors for BRR’s credit upsides. Downside risks could occur if an aggressive investment drives the total debt to capitalization ratio above 70% and weakens cash flow protection for an extended period.
BRR is one of the sugar producers in Thailand. It was established in 1963 by the Tangtrongwechakit family. The company was listed on the Stock Exchange of Thailand (SET) in November 2014. As of March 2016, the Tangtrongwechakit family collectively held 74.3% of the company’s shares. The company owns and operates one sugar plant located in Buriram province, with a cane crushing capacity of 24,000 cane tonnes per day. BRR procured 2.06 million tonnes of sugarcane in the 2015/2016 production period and produced 238,994 tonnes of sugar. For the 2015/2016 production period, BRR’s market share was 2.4% in terms of sugar production. The company’s crushing yield for the 2015/2016 period was high at 115.98 kilograms (kg) per cane tonne, better than the industry average of 103.98 kg. The company was ranked fourth among 52 sugar mills in Thailand in terms of crushing yield in the 2015/2016 production period.
BRR produces two kinds of sugar, brown sugar for domestic customers and raw sugar for export. Apart from sugar business, BRR has gradually expanded along the sugar value chain to maximize the utilization of sugarcane. BRR’s sugar-related businesses include electricity generation and fertilizer production. BRR has sold 16 megawatts (MW) of power capacity to the Provincial Electricity Authority (PEA) under the Very Small Power Producer (VSPP) scheme. BRR is developing its third 9.9 MW power plant. The third unit of power plant is expected to be operational in late 2016. Power and fertilizer comprised 8%-16% of BRR’s total sales during 2012-2015.
In 2015, BRR’s financially outperformed most sugar millers. The improvement was mainly due to a 12% year-on-year (y-o-y) growth in the sales volume of sugar despite a 9% y-o-y drop in the average selling price. The commercial operation of the second unit of power plant and the fertilizer plant also underpinned revenue growth. Total sales grew by 7% y-o-y to Bt4,187 million in 2015. Despite falling sugar prices, BRR’s operating margin before depreciation and amortization slightly improved to 12% in 2015, from 11.8% in 2014. The improvement mainly came from more contribution in the power business. As a result, BRR’s earnings before interest, tax, depreciation and amortization (EBITDA) increased to Bt566 million in 2015 from Bt487 million in 2014. In the first quarter of 2016, revenues continued to rise to Bt1,481 million, a 7% y-o-y increase over the same period of the prior year. EBITDA was flat at Bt228 million during the first three months of 2016, compared with Bt234 million over the same period of 2015.
BRR’s financial leverage continued to rise. The debt to capitalization ratio jumped to 65.6% in 2015 from 58.8% in 2014. The rise followed hefty expansion for the power plant business. EBITDA interest coverage ratio was 3.5 times in 2015, compared with 4.5 times in 2013 and 2.9 times in 2014. The funds from operations (FFO) to total debt ratio slightly declined to 9.9% in 2015 from 11.9% in 2014 and 14.4% in 2013 due to the rise in borrowings for the expansion.
The sugar industry recovers from the falling sugar prices in 2016 due to a projected sugar output deficit worldwide. Raw sugar prices worldwide increased gradually in 2016, growing by 5% to 14.51 cents per pound during the first four months of 2016, compared with an average 13.84 cents per pound in 2014. The rising consumption worldwide, severe drought caused by the El Nino, and lower sugar inventories drove the sugar price higher. The higher sugar prices benefited all sugar millers, including BRR. Even though cane supply nationwide dropped by 11%, BRR’s cane procurement rose by 5.6% to 2.06 million tonnes in the 2015/2016 production period, from 1.95 million tonnes in the 2014/2015 period owing to expansion of planting areas of contracted cane growers. BRR’s EBITDA is expected to improve to Bt700-Bt800 million per annum during 2016-2018 on the back of gradually-improving sugar prices and cane outputs. BRR’s capital expenditures will be set at Bt700-Bt1,000 million per annum. BRR’s expenditures will be mainly for building refinery sugar plant and its third power plant. Given the expected total EBITDA and planned investments, the company’s leverage is anticipated to remain high over the next few years.
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