TRIS Rating has assigned the rating of “A+” to MPSC’s proposed issue of up to Bt4,100 million in senior unsecured debentures of Mitr Phol Sugar Corporation Ltd. (MPSC). At the same time, TRIS Rating has affirmed the rating of “A+” to the company rating and the ratings of the outstanding senior unsecured debentures of MPSC. The outlook remains “stable”. The “A+” ratings reflect the company’s leading market position in the sugar industry in the Asia Pacific region, moderate level of geographic diversification, well-accepted brand name, efficient sugar mill operations, and diversified sources of income. The ratings are partially weighed down by the cyclical nature of sugar prices and volatility of sugarcane as well as the regulatory risks.
The “stable” outlook reflects TRIS Rating’s expectation that MPSC will maintain its leading position in both the Thai and Chinese sugar industries. The ratings or outlook would be downgraded if MPSC’s operating performance is significantly weaker than expected, resulting in a weaker capital structure and deteriorating cash flow protection for a sustained period of time. Any large, debt-funded investment that would weaken the debt to capitalization ratio would also be a negative factor for MPSC’s credit ratings. The credit upside for MPSC’s ratings is unlikely in the near term given the current financial profile. However, the rating upside could emerge if MPSC’s financial profile is significantly strengthened on a sustainable basis.
MPSC was established in 1946 by the Vongkusolkit family. The Vongkusolkit family collectively holds 100% of the company’s shares through Mid-Siam Sugar Co., Ltd. MPSC owns and operates sugar mills in Thailand, China, Lao People's Democratic Republic (Lao PDR), and Australia. For the 2015/2016 growing season, MPSC produced 3.52 million tonnes of sugar across all its locations.
MPSC has long been the leader in the Thai sugar and sugarcane industry. In the 2015/2016 growing season, MPSC’s six sugar mills in Thailand produced 2.0 million tonnes of sugar, earning MPSC the highest market share (20.1%), based on production volume. In China, MPSC is among the top two major sugar producers. It owns and operates six sugar mills, which produced 0.9 million tonnes of sugar in the 2015/2016 season. MPSC’s sugar mills in the Lao PDR and Australia together produced 0.6 million tonnes totally. Apart from producing sugar, MPSC has expanded along the sugar value chain, creating related businesses in order to maximize the utilization of sugarcane and the by-product of the sugar manufacturing process. MPSC’s related businesses include generating electricity, producing ethanol, production of wood-substitute material, and logistics.
In 2015, MPSC’s total sales were Bt88,316 million. The sugar segment accounted for 80% of MPSC’s revenues. Sugar production in Thailand comprised 43% of total revenues while sugar production in China made up 29%. The operations in the Lao PDR and Australia collectively contributed 7% while the power and ethanol segments together comprised 14% of total revenues.
MPSC’s performance in the first nine months of 2016 was hurt by low sugar prices and a drought in the South East Asia region. The drought cut MPSC’s sugar production by 11.5% over the same period of the prior year (y-o-y) to 3.52 million tonnes in the 2015/2016 crop year. Drought in this region and in many other major sugar producing countries reduced production of sugar worldwide. As a result, the 2015/2016 crop year became the first year of global sugar deficit in six years. Prices of sugar worldwide rebounded significantly, jumping from an average of 10.67 cents per pound in August 2016 to about 20 cents per pound currently. The price increase has improved profitability of MPSC’s sugar operations in the Lao PDR and Australia, and partly offset the drop in sugar volume in China. However, MPSC’s sugar operation in Thailand have not yet benefited from the price rise because all the selling prices in 2016 were fixed before the price rebounded, similar to most peers in sugar industry in Thailand. The drought also lessened the raw material needed to produce power and ethanol as the sugar cane decreased. As a result, total revenues declined by 5.7% y-o-y to Bt66,847 million in the first nine months of 2016. Cost of sugar production also increased as sugar yield declined following unfavorable weather. The power and ethanol segments also reported lower profit because of lower utilization of power plants, and falling prices of power tariff and ethanol. Therefore, MPSC’s ratio of operating income before depreciation and amortization to sales, including gains from its future contracts, declined to 15.4% in the first nine months of 2016, compared with 18.6% over the same period in 2015. The drop in revenues and profitability lowered earnings before interest, tax, depreciation, and amortization (EBITDA) by 23.5% y-o-y to Bt11,408 million in the first nine months of 2016. The funds from operations (FFO) plummeted by 23.1% y-o-y to Bt8,771 million in the first nine months of 2016. The EBITDA interest coverage ratio weakened to 5.4 times. FFO to total debt ratio remained adequate at 14.9% in (annualized from the trailing 12 months) in the first nine months of 2016. MPSC’s financial leverage is moderate. The total debt to capitalization ratio hovered around 51%-53% from the end of 2014 through September 2016.
Looking forward, MPSC’s operating performance is expected to improve in 2016/2017 growing season. Most sugar producers in Thailand, including MPSC, have locked in by contracts the selling prices for 60%-70% for their forecast production volumes in 2017. The contract prices are on average nearly 40% higher than the average selling prices in the 2015/2016 growing season. The worldwide sugar deficit is expected to continue for a second year, as demand outstrips supply during 2016/2017 growing season. As a result, sugar prices worldwide hovers around 18-20 cents per pound currently. The significant increase in selling prices should more than offset the expected modest decline in sugar production in Thailand and China in 2016/2017. MPSC’s EBITDA is forecast to improve gradually to approximately Bt18,000-Bt20,000 million per year in 2017-2019 under the base case scenario, compared with Bt14,000 million in 2016. MPSC has budgeted maintenance capital expenditure at around Bt5,000 million per year. In addition, MPSC has received approval to increase crushing capacity by 84,000 tonnes of cane per day. The investment will cost about Bt20,000 million, spread over several years. As a result, the FFO to total debt ratio is expected to improve to 20%-25% and EBITDA interest coverage will hover around 6-7 times.
In October 2016, the Thai Cabinet has approved in principle a proposal by the Minister of Industry to revise the Cane and Sugar Act in order to ensure fairness to all stakeholders and comply with the World Trade Organization regulations. Under the proposed changes, the existing quota system, domestic price controls, and subsidies for cane growers may be eliminated. However, the industry-wide profit sharing scheme will still exist. The potential effects of the change will have on sugar producers are not yet clear as the revision has not been finalized.
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