TRIS Rating has affirmed the company rating and the ratings of the senior unsecured debentures of Double A (1991) PLC (DA) at “BBB-”. At the same time, TRIS Rating has revised the rating outlook of DA to “negative” from “stable” to reflect a slower-than-expected recovery in the company’s operating performance and a delay in the deleveraging plan.
The “BBB-” ratings continue to reflect DA’s position as one of the leading printing & writing (P&W) paper producers in Thailand, its fully integrated pulp and paper mills, and the strong brand name of “Double A” products. These strengths are partially offset by the inherent volatility of the pulp and paper industry, DA’s exposure to foreign exchange risk, falling demand for P&W paper due to a wide-spread slowdown in the global economy and a shift of consumer behavior towards digital media, and some related-party transactions.
The “negative” outlook reflects a slower-than-expected recovery in the company’s operating performance and a delay in the deleveraging plan. The ratings could be revised downward if DA’s operating performance, as well as cash flows, fall below expectations or if the capital structure deteriorates more than expected. In contrast, the outlook could be revised back to “stable” if sales and profitability improve, boosting cash flow protection, as planned. The company rating will also be influenced by the company rating of National Power Supply PLC (NPS), which has the same ultimate shareholder, according to TRIS Rating’s group rating methodology. Any change in the company rating of NPS would affect the company rating of DA, accordingly.
DA is the leading P&W paper producer in Thailand. It currently owns and operates five paper mills, with a total design capacity of 1,045,000 tonnes per annum (tpa). Paper production capacity doubled after the start-up of the third paper mill (APM3) in November 2012 and the acquisition of the Alizay paper mill (Alizay) in France in January 2013. APM3 has a design capacity of 220,000 tpa of paper products, while Alizay has a design capacity of 300,000 tpa. DA also has its own pulp production capacity of 427,000 tpa. to support its paper production.
Paper sales account for about 90% of the company’s annual sales. DA’s markets are geographically diverse, and it has a strong distribution network covering over 150 countries worldwide. Sales to the Thai (domestic) market comprised almost 30% of total sales. About 50% of sales came from other markets in Asia, 10% from markets in Europe, and 10% from other countries.
DA’s operating performance in 2015 was below expectations. Earnings fell due to problems with utilities and paper machine problems plus the launch of a range of new lower-price products, under second brands, designed to build market share in new markets. The net loss from operations in 2015, defined as the net loss excluding exchange rate gains or losses and other extraordinary items, was Bt2,391 million, larger than the net loss from operations of Bt1,116 million in 2014. However, a huge foreign exchange rate gain reduced the net loss in 2015 to Bt941 million. In the first nine months of 2016, DA’s operating performance improved moderately from the low levels achieved in 2014 and 2015.
Revenue in the first nine months of 2016 rose by 15.1% year-on-year (y-o-y) to Bt20,093 million from Bt17,460 million in the first nine months of 2015. The operating profit margin (operating income before depreciation and amortization as percentage of sales) rose to 9.4% in the first nine months of 2016, from a very low level of 3.6% in 2015. The improvement in profitability resulted from a rebalancing of the product mix. DA dropped low margin products and emphasized premium products. The reduction in the number of product lines reduced the production problems and lowered the cost of production in the first nine months of 2016. An increase in sales and profitability raised earnings before interest, tax, depreciation, and amortization (EBITDA) to Bt1,943 million in the first nine months of 2016, from Bt929 million in the same period of the prior year. DA reported the net loss from operations of Bt609 million in the first nine months of 2016, lower than the net loss from operations of Bt1,611 million in the same period of the prior year. However, including a huge foreign exchange loss in the first nine months of 2016, the net loss in the first nine months of 2016 rose to Bt1,025 million, from the net loss of Bt9 million in the same period of the prior year. Funds from operations (FFO) in the first nine months of 2016 improved moderately, increasing to Bt971 million, from Bt780 million in the first nine months of 2015.
DA’s capital structure deteriorated as continued losses lowered the equity base. The debt to total capitalization ratio as of September 2016 stood at 58.7%, up from 58% in 2015 and 57.6% in 2014. The level of leverage was higher than TRIS Rating’s expectations because DA delayed its plan to sell the remaining 25.5% stake in NPS, an associated company. The FFO to total debt ratio improved, but remained at a very low level. The ratio increased to 4.9% in the first nine months of 2016 (annualized, from the trailing 12 months), versus 2.9% in 2014 and 3.9% in 2015. The EBITDA interest coverage ratio increased to 2.1 times in the first nine months of 2016, versus 1.7 times in 2014 and 0.8 times in 2015.
DA has an improvement plan designed to boost sales and profitability. The plan includes the rebalancing of product mix, the enhancement of production efficiency, and the reduction of operating costs. DA will put more focus on its strategic markets rather than penetrating into many new markets to lower operating costs. Under TRIS Rating’s base case, FFO is forecast to increase gradually to about Bt2,000 million per annum, from Bt864 million in 2015. Leverage, excluding the divestment of the remaining stake in NPS, is projected to remain high. In addition to capital expenditures for annual maintenance, DA plans to invest in a 30-megawatt (MW) biomass power plant at Alizay in 2017. The project will cost €45 million, or approximately Bt1,700 million, in total. The company plans to finance most of the project (70%) with long-term debt and 30% from operating cash flow. The power plant is expected to start producing electricity in the second quarter of 2018. The debt to capitalization ratio is forecast to rise to 60%-63% over the next three years. The FFO to total debt ratio will increase gradually to 10% and the EBITDA interest coverage ratio will increase to 2-3 times over the next three years. FFO, as forecast, should cover nearly all maintenance capital expenditures of about Bt1,000 million per annum and annual long-term bank debt repayment of about Bt600 million over the next three years. DA plans to refinance the bonds maturing in December 2016 (DA16DA) and February 2017 (DA172A), amounting to Bt2,254 million, with new bonds.
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