TRIS Rating affirms the company rating on Oishi Group PLC (OISHI) at “A+”. The rating reflects OISHI’s position as a strategically important subsidiary of Thai Beverage PLC (ThaiBev: rated “AA/Stable”), a leading beverage company in Thailand. The rating also reflects OISHI’s well-known brand, leading market position in the ready-to-drink (RTD) tea segment in Thailand, and strong balance sheet. The rating is weighed down by a shrinking market for domestic RTD tea, intense competition in the restaurant segment, and the slow economic recovery in Thailand which affects consumer spending.
KEY RATING CONSIDERATIONS
Support from ThaiBev Group
ThaiBev is one of the leading beverage companies in Thailand. OISHI’s relationship with ThaiBev dates back more than 10 years when ThaiBev acquired a majority stake in 2006. As of May 2018, ThaiBev owned 80% of OISHI’s outstanding shares.
OISHI manufactures RTD tea products and other non-alcoholic beverages, which ThaiBev then distributes through its extensive distribution network. Through a network which covers over 400,000 retail outlets, OISHI’s products are available throughout Thailand. In addition, OISHI serves as a contract manufacturer. It has manufacturing agreements with affiliates of ThaiBev. Contract manufacturing increases the utilization rate of OISHI’s production facilities.
New excise tax law shrinks size of RTD tea market
A new excise tax act took effect in mid-September 2017. The excise tax on RTD tea rose from 0% to 10% of the suggested retail selling price. The new act also imposes a tax based on the sugar content of beverages. The sugar tax will increase gradually from 2017 to 2023. As a result, consumers may shift toward beverages with less sugar and become more health conscious.
After the imposition of the new tax, producers of RTD tea increased prices in late 2017 to compensate for the higher tax burden which caused market demand to plunge. For example, OISHI’s domestic sales of RTD tea fell 16% year-on-year (y-o-y) in the first nine months of fiscal year (FY) 2018 (Oct 17-Jun 18). This drop was in line with the drop in sales of the whole RTD tea segment. TRIS Rating expects demand in the RTD tea market to stabilize and beverage producers to be able to adapt to the new excise tax.
Strong position in RTD tea segment
Despite the recent drop in sales in the RTD tea segment, OISHI has remained the market leader. OISHI’s market share was 45% over the previous 12 months ending June 2018. Its strong market position is supported by the well-known, Japanese-themed “OISHI” brand, and an extensive distribution network which yields high market penetration.
OISHI’s beverage sales in the domestic market was Bt3,784 million in the first nine months of FY2018, a 17% drop y-o-y. The drop was due to a rise in the price of RTD tea and a fire at the UHT production lines in the Navanokorn plant.
OISHI’s export sales are growing. Beverage exports grew at an average annual rate of 38% during 2014-2017, reaching Bt881 million in 2017. Exports rose by 49% to Bt989 million in the first nine months of FY2018, accounting for 20% of total beverage sales. We expect export sales will be one of the key drivers of growth in the beverage segment.
In November 2017, the UHT production line at the Navanakorn plant caught fire. The fire affected 12% of total production capacity though UHT beverages accounted for less than 10% of total beverage sales. Insurance will cover property damage, lost inventory, and the interruption in business. A new UHT line is expected to start operation in late 2018.
Restaurant segment faces intense competitive pressure
The restaurant segment has good growth prospects. Changes in consumer behavior, such as fast-pace lifestyles, and increased urbanization have raised demand. The competition has increased as well because there are low barriers to entry in the restaurant industry. In addition, the slow economic recovery in Thailand has constrained the growth of the company’s restaurant segment. Same-store sales at OISHI’s restaurant outlets declined by 2% in 2017 and 4% in the first nine months of FY2018. However, revenue in the restaurant segment held steady because OISHI opened new restaurants. Revenue was Bt6,064 million in 2017 and Bt4,539 million and in the first nine months of 2018. Shabushi restaurants contributed a majority portion of revenue in the restaurant segment.
Urbanization and rising income have made packaged food more popular with consumers. OISHI plans to capitalize on these trends. Revenue from package food was Bt433 million in 2017 and Bt314 million the first nine months of 2018, accounting for 6% of revenue in the food segment. The package food segment can take advantage of excess capacity at OISHI’s central kitchen in Chonburi.
Low leverage and abundant cash flow protection
OISHI has a strong balance sheet. Adjusted net debt was Bt1,211 million while the adjusted net debt to net capitalization ratio was 17.2% as of June 2018. OISHI has had little need to borrow. It made less than Bt1,000 million in new investments in each of the last three years (2015-2017). At the same time, cash flow grew along with sales, and cost control efforts boosted profits. However, after prices for RTD tea jumped in FY2018, sales fell and funds from operations (FFO) dropped 25% y-o-y to Bt1,516 million in the first nine months of FY2018. Liquidity remained strong however. The FFO to adjusted net debt ratio was 179% and EBITDA interest coverage was 30 times as of June 2018.
During 2018-2021, OISHI plans capital expenditures totaling about Bt4,600 million. The expenditures will cover a new UHT production line to replace the one damaged by fire, adds a new beverage production line, and opens more restaurant outlets. TRIS Rating forecasts revenue growth of 3%-4% per annum, driven by beverage exports and more restaurant outlets. The operating margin will stay above 16% and FFO will range between Bt2,100-Bt2,300 million per year during 2019-2021. OISHI’s balance sheet will remain strong. The adjusted net debt to capitalization will stay below 11%. OISHI’s debt serviceability will remain strong as well. The FFO to adjusted net debt is forecast to stay above 200% during 2019-2021.
RATING OUTLOOK
The “stable” outlook is based on the expectation that OISHI will remain a strategically important subsidiary of ThaiBev. TRIS Rating also expects OISHI to maintain competitive position in the RTD tea segment and deliver sound operating results.
RATING SENSITIVITIES
The rating could be revised upward if operating performance and cash flow rise significantly on a sustained basis. A rating downgrade would occur if operating performance deteriorates for a prolonged period of time. Any change, in our view, on the degree of strategic importance and linkage to the ThaiBev Group could affect OISHI’s credit rating accordingly.
COMPANY OVERVIEW
OISHI is one of the leading providers of non-alcoholic beverages and food service in Thailand. The company was established in 1999, as a Japanese restaurant. OISHI began to produce and distribute Oishi Japanese green tea in 2003. The company was listed on the Stock Exchange of Thailand (SET) in 2004. ThaiBev purchased 40.2% of OISHI’s shares from its founder in 2006 and acquired more shares through a tender offer in 2008. As of May 2018, ThaiBev was the major shareholder, controlling 80% of OISHI’s paid-up shares.
OISHI's products feature Japanese style and are offered under the brand “Oishi”. The flagship product, OISHI green tea, is the market leader in the Thai RTD tea segment. The company also produces herbal drinks, sold under the brand name “Jubjai”. In the food segment, OISHI owns and operates several Japanese restaurant chains. such as Oishi buffet (Japanese food buffet), Shabushi (shabu hot pot and sushi buffet), Oishi Ramen (Japanese noodles), Nikuya (Japanese style barbeque), and Kakashi (a quick service restaurant serving Japanese rice bowls). OISHI also offers a food delivery service and supplies frozen and chilled foods. As of June 2018, OISHI had 249 restaurant outlets. Shabushi is the company’s largest restaurant brand with 134 outlets in Thailand and two outlets in Myanmar.
OISHI's production facilities comprise three beverage plants, one each in Pathumthani, Chonburi, and Saraburi provinces. The combined annual production capacity was about 540 million liters of beverages as of June 2018. OISHI also acts as a contract manufacturer, producing drinking water and dairy products for companies in the ThaiBev Group. OISHI owns one central kitchen, located in Chonburi province.
OISHI recorded Bt13,551 million of sales in 2017 and Bt9,626 million in the first nine months of 2018. The beverage segment and food segment each accounted for 50% of total revenue for the first nine months of 2018.
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