TRIS Rating has assigned the company rating of Energy Earth PLC (EARTH) at “BBB-” with “stable” outlook. The rating reflects EARTH’s established position in the coal trade in Thailand and the moderate diversity of its markets. The rating also incorporates the company‘s strategy to secure coal supply and enhance cost competitiveness using prepayments to the coal miners along with direct mine acquisitions in Indonesia. The strengths are partially offset by EARTH’s limited track record in coal mining, inherent earnings volatility and intense competition in the coal markets, the exposure to adverse regulatory changes in Indonesia, and the high working capital funding needs of its trading operations.
The “stable” outlook reflects TRIS Rating’s expectation that EARTH will maintain its competitiveness and market position in the coal trading industry. EARTH’s credit upsides may happen if the outlook of the coal industry improves or the commercial operations of its mines increase the levels of profitability and cash flow generation, which can lead to higher cash flow protection on a sustainable basis. The downside risk could occur if coal prices continue a downtrend and negatively impact EARTH’s profitability and cash flow generation noticeably on an extended period. Any debt funded expansion, which will deteriorate EARTH’s capital structure markedly and weaken cash flow protection, is also a negative factor for EARTH’s credit rating.
EARTH is a medium sized coal trader in Thailand. The Phihakendr and Khamdee families founded Energy Perfect Co., Ltd. (EPCL) in 2007, and made a reverse takeover (backdoor listing) of Advance Paint and Chemical (Thailand) PLC in 2010. Since then, the company has changed the name to Energy Earth, and EPCL has been operated as EARTH’s subsidiary. EARTH was initially listed on the Market for Alternative Investment (mai) in 2010 before being listed on the Stock Exchange of Thailand (SET) in 2014. EARTH also applied for a dual listing on the Frankfurt Stock Exchange in 2013. As of March 2016, the Phihakendr and Kamdee families were the major shareholders, holding approximately 44% interest in EARTH.
Since its establishment in 2007, EARTH has continued to grow its sales volume and expand the customer base. Coal sales surpassed 10 million tonnes in 2015, an increase of 23% from 2014 and from less than one million tonnes before 2010. EARTH sources the majority of its coal directly from the miners in Indonesia, using prepayments. The company currently sells the coal in seven countries including China, Thailand, South Korea, India, and Taiwan. To secure coal supply and increase cost competitiveness, EARTH acquired the Indonesian mining company in 2011. The acquired company allowed the operations of two mines in South Kalimantan with coal reserves of 7.4 million tonnes and the seam extraction was gradually completed by EARTH in 2014. Later, the company made additional acquisition of the exclusive coal offtake, and purchased another Indonesian mining company totaling US$238 million (or Bt8,395 million at Bt35.24/US$). As of March 2016, EARTH had the coal reserves of approximately 83 million tonnes from the two mines. At the same time, EARTH made advance payments and deposits to the majority of its coal suppliers to also secure additional coal reserves in the future. In terms of market destination, China remained the largest customer, accounting for 63% of total sales in 2015, followed by Thailand and Korea, which contributed around 26% and 6%, respectively. Most of EARTH’s international sales have been to coal-fired power plants while the cement plants have dominated around one-third of its domestic sales, or 8% of the total sales.
EARTH’s financial performance during 2013-2015 was negatively affected by continuing declines in coal prices due to a weakening demand outlook amid the economic concern in China, along with excess supply. Although EARTH’s sales volume in 2015 grew 29% from 2013, its operating margins (operating income before depreciation and amortization as a percentage of sales) were lower from 17.7% in 2013 to 9.7% in 2015 and 11.1% in the first quarter of 2016. However, the declines were partly explained by an absence of EARTH’s lower-cost coal available from its own mines as the coal was depleted in 2014.
The lower coal prices combined with EARTH’s rising leverage from high working capital funding needs and mine acquisitions led to continued declines in its funds from operations (FFO) to Bt1,122 million in 2015 from its peak of Bt1,835 million in 2013. The recent expansion of operations also resulted in an increase of EARTH’s total debt to capitalization from 52% in 2011 to 69% in 2014, before slightly improving to around 62% both in 2015 and in the first quarter of 2016. The improvements were because EARTH’s equity base increased from the use of the share swap in acquiring the mining company in 2015. The majority of EARTH’s debt is short-term. However, the company’s near-term refinancing risk remains manageable. EARTH’s FFO to total debt ratio in 2015 and in the first quarter of 2016 (annualized, from the trailing 12 months) declined to approximately 6% from 21.6% in 2013 and 11.5% in 2014. EBITDA interest coverage ratio stood at 2.7 times in 2015 and 2.3 times in the first quarter of 2016.
EARTH’s FFO is anticipated to lower in 2016 because the huge exchange rate gain similar to 2015 is not expected. However, FFO is expected to improve to be approximately Bt1,300-Bt1,500 million per year during 2017-2018 under a base case scenario owing to the lower cost from commercial operations of its acquired mine. EARTH’s capital expenditure is expected at Bt1,300 million in 2016-2018 mainly for the mine development and the jetty. The company’s leverage is expected to gradually improve, but remain relatively high over the next few years due to the planned capital expenditure and dividend payment. FFO to total debt are expected to hold approximately 7%, and EBITDA interest coverage ratio will remain around 2-3 times in 2016-2018.
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