TRIS Rating has affirmed the company rating and the rating of the senior unsecured debentures of Khon Kaen Sugar Industry PLC (KSL) at “A” with “stable” outlook. The ratings reflect the company’s long track record in the sugar and sugarcane industry, as one of the leading sugar producers in Thailand, and diversification into sugar-related businesses. The ratings are partially offset by the cyclicality of sugar prices and volatility of sugarcane, the operational risks of KSL’s sugar operations in the Lao People’s Democratic Republic (Lao PDR) and Cambodia, as well as the company’s relatively high leverage.
The “stable” outlook reflects TRIS Rating’s expectation that KSL will maintain its competitive position in the Thai sugar industry. The revenue sharing system of the Thai sugar industry and contribution from ethanol and power segment will partly alleviate volatility in sugar prices.
KSL’s credit upside is limited as its financial performances are during recovery from down cycle. In contrast, KSL’s ratings could be revised downward, should its operating performance or capital structure continues to weaken. An aggressive debt-funded investment and persistently weak cash flow protection are also negative factors for KSL’s credit ratings.
KSL is one of the leading sugar producers in Thailand, established in 1945 by the Chinthammit family and associates. As of April 2016, the Chinthammit family collectively held 69% of the company’s shares. The company owns and operates five sugar plants in Thailand, with a combined cane crushing capacity of 110,000 cane tonnes per day as of May 2016. KSL Group has procured 7.6 million tonnes of sugarcane in the 2015/2016 crushing period and produced 774,327 tonnes of sugar. KSL’s sugar production in the 2015/2016 growing season was ranked third with a market share of 7.9%, trailing the Mitr Phol Group (20.1%) and the Thai Roong Ruang Group (14%).
Since fiscal year (FY) 2006, KSL has expanded along the sugar value chain to maximize the utilization of sugarcane. KSL’s sugar-related businesses include electricity generating and ethanol producing. During FY2014 and FY2015, revenue from the energy segment (electricity and ethanol) accounted for 18% of total sales.
Apart from producing sugar in Thailand, KSL also operates sugar plants in the Lao PDR and Cambodia. The plants in the Lao PDR and Cambodia started commercial production in FY2010. Total investment cost in the Lao PDR and Cambodia was approximately Bt5,200 million. The company’s sugar production in both the Lao PDR and Cambodia remained below the break-even level, only 26,000 tonnes in the 2015/2016 growing season. The company’s sugar operation in the Lao PDR and Cambodia was additionally hurt by the sharp fall in sugar prices. As a result, KSL’s operations in the Lao PDR and Cambodia have continued to report losses. The combined loss totaled Bt115 million for the first half of FY2016.
KSL’s financial performance for FY2015 and the first half of FY2016 were negatively affected by the down cycle of sugar prices. KSL’s gross margin dropped to 21.4% in FY2015 from 25.2% in FY2014. The drop was mainly due to falling sugar price for sugar business. The energy-related segment also reported softer margin following weaker prices. In FY2015, despite strong ethanol’s consumption nationwide, the reference price of ethanol dropped by 3% year-on-year (y-o-y) to Bt26.5 per liter in FY2015, while the power tariff rate declined by 4.3% y-o-y along with the falling Fuel Transfer (Ft). KSL’s operating income before depreciation and amortization as a percentage of total sales declined to 13.1% in FY2015, compared with 17.9% in FY2014. KSL’s earnings before interest, tax, depreciation and amortization (EBITDA) decreased to Bt3,139 million in 2015, from Bt3,816 million in 2014 due to a lower margin. For the first six months of FY2016, KSL’s EBITDA declined to Bt1,701 million, a 17% y-o-y drop, from Bt2,048 million over the same period of FY2015. In addition to falling export prices, KSL was hurt by rising production cost of sugar. The drought in Thailand has cut cane production nationwide by 11.2% y-o-y to 94.05 million tonnes and lowered sugar yield to 103.98 kilograms (kg) per cane tonne in the 2015/2016 growing season from 106.65 kg per cane tonne in the 2014/2015 growing season. As a result, KSL’s sugar production plunged by 15.3% y-o-y to 774,327 tonnes of sugar in the 2015/2016 growing season. Falling ethanol price and power tariff also attributed to a drop in EBITDA for the first six months of 2016.
KSL’s financial leverage was relatively high with a debt to capitalization ratio of 59.1% at the end of FY2015. The EBITDA interest coverage ratio was cyclically down to 3.7 times in FY2015, from 4.7-8.3 times in FY2012-FY2014. The fund from operation (FFO) to total debt ratio was at 9.9% in FY2015, compared with a range of 13.4%-25% in FY2012-FY2014.
Looking forward, KSL’s financial performance is expected to remain weak in FY2016 before improving in FY2017 on the back of recovery in sugar prices. The price of raw sugar rose significantly to 19 cents per pound currently from an average 10.7 cents per pound in August 2015 owing to the drop in sugar production in major producing countries. The 2015/2016 growing season is projected to be the first year of global sugar deficit in six years. With improving sugar price assumption, KSL’s total EBITDA is forecasted to be approximately Bt3,000-Bt3,500 million per year during FY2016-FY2018. KSL’s capital expenditures for FY2016-FY2017 are estimated at Bt2,000 million per year, lower than Bt3,000-Bt6,000 million per year in FY2013-FY2014. With planned investments and dividend payments, the company’s leverage is expected to improve gradually to hover around 50% in the medium terms. The cash flow protection is expected to be improved in FY2016-FY2018 following the recovery in sugar prices and declining debt level.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2016, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.