TRIS Rating downgrades the company rating on Mitr Phol Sugar Corporation Ltd. (MPSC) and the ratings on MPSC?s senior unsecured debentures to ?A? from ?A+?, with a ?stable? outlook.
The rating downgrade reflects MPSC?s materially elevated financial leverage relative to cash generation. We expect the company?s financial leverage to remain at high levels over the next few years given the company?s investment plan that will require sizable financing to fund planned capital expenditures. The ratings are also constrained by the volatility of sugarcane supplies and sugar prices, and the company?s operational risk associated with its overseas sugar plants.
Nevertheless, the ratings continue to reflect MPSC?s market position as one of the world?s leading sugar producers, well-accepted brand name, efficient sugar mill operations, geographic diversification, and diversified sources of income.
KEY RATING CONSIDERATIONS
Weakened operating results but revival expected
MPSC?s operating results over the past two years have been pressured by a drastic contraction in sugarcane supplies following severe drought and lower plantation areas in several countries. MPSC?s sugar production plunged by 18% from the 2018/2019 growing season. The ethanol and power businesses were also adversely affected by lower consumption during the Coronavirus Disease 2019 (COVID-19) pandemic and sugarcane shortages that resulted in higher fuel costs.
Although a rise in sugar prices in 2021 partly held up the profitability of MPSC?s sugar business in Thailand, the company posted weaker operating results during the first nine months of 2021. This was mainly caused by higher raw material costs in the power business, coupled with losses from investments in Indonesia. MPSC recorded losses from new sugar plants in Indonesia totaling THB240 million in the first nine months of 2021, owing to lower domestic sugar prices during the COVID-19 pandemic and higher imported raw sugar costs.
As a result, earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped to THB9.1 billion in the first nine months of 2021, from THB10 billion and THB13 billion during the same periods of 2019 and 2020. EBITDA margin also dropped to around 12% in the first nine months of 2021, compared with the levels of 15% and 18% in the same periods of 2019 and 2020.
MPSC?s operating results are likely to continue facing significant challenges in the coming years stemming from uncertain sugar prices and rising freight costs. However, we expect the company?s performance to revive during the forecast years, along with a supply correction and post-COVID-19 economic recovery. Sugarcane production volume should increase during the 2022-2023 season owing to improved rainfall and plantation areas for sugarcane. We also expect the company to benefit from the recent rise in sugar prices, while the production of more value-added products will improve the company?s competitive edge and profitability in the medium to long term.
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Leverage surged following sizable investments and working capital requirements
MPSC?s financial leverage has increased significantly, owing to higher working-capital requirements and sizable capital expenditures, together with declining profit during the industry downturn.
As of September 2021, MPSC?s adjusted debt continuously rose to THB95.8 billion, owing to the substantial amount of investments in several refineries and sugar mills in Indonesia, and acquisitions of new power plants. The rise in debt was also partly due to increased working-capital requirements to fund the company?s higher inventory costs in Thailand and China during the recent period of rising sugar prices. MPSC?s inventory days surged to 115 days at the end of September 2021, from 80 and 90 days during the same periods of 2019 and 2020, respectively.
The total debt to capitalization ratio increased to 57.3% at the end of September 2021, from 54% in 2019. The adjusted debt to EBITDA rose to 8.8 times (annualized, from the trailing 12 months) in the first nine months of 2021, from 4.6-7.3 times in 2019-2020. Cash-flow protection during the industry downcycle also weakened significantly. The ratio of funds from operations (FFO) to adjusted net debt declined to 7.8% (annualized, from the trailing 12 months) in the first nine months of 2021, from 9%-17% in 2019-2020.
Going forward, we project MPSC?s leverage to stay high due to a number of large investments in the pipeline. Total capital expenditures are projected to reach THB10-THB12 billion per year in 2022-2023. These mainly involve the development of a new sugar plant and acquiring several power plants in Thailand. The company also aims to expand its footprint in the wood-substitute business in Vietnam. We project the company?s debt to capitalization ratio to increase to 58% in 2022-2023. The ratio of adjusted debt to EBITDA is projected to hover around 7.2 times in 2021 but should then improve to around 6.5 times in 2023.
Energy business cushions revenue fluctuation
Apart from producing sugar, MPSC has expanded along the sugar value chain in order to maximize the utilization of sugarcane and by-products of the sugar production process. MPSC?s sugar-related businesses are electricity generation and ethanol production. Currently, MPSC has an installed power generation capacity of 650 megawatts (MW) with 272.8 MW sold under power purchase agreements (PPA) with government agencies. Ethanol production is 1.49 million liters per day at full capacity.
In spite of the negative impacts from sugarcane feedstock shortages and lower demand during the COVID-19 period, revenue from the energy business (electricity and ethanol) increased by 9.7% year-on-year (y-o-y) to THB14.8 billion in the first nine months of 2021. The increase was mainly driven by capacity expansions of power plants.
At present, the power and ethanol businesses together contribute about 20% of MPSC?s total revenues. The stable cash flow from the expanded energy business has partly held up MPSC?s operating performance during the period of depressed sugar prices.
Adequate liquidity
We assess MPSC to have adequate liquidity over the next 12 months. Funding needs will include THB4.5 billion for maturing debentures, THB4.5 billion for maturing long-term loans, and capital expenditures of about THB10 billion. The sources of funds will come from FFO of around THB10 billion and undrawn short-term credit facilities of about THB34 billion. We view that the company?s ability to access external funding sources, including the domestic debt capital market and bank financing, remains unchanged.
As of September 2021, MPSC recorded THB14.7 billion of priority debt out of total debt (excluding lease liabilities) of THB94.3 billion. Most of MPSC?s priority debt was at the subsidiary level. The ratio of priority debt to total debt was 16%. As its priority debt ratio is far below the 50% threshold, TRIS Rating views that MPSC?s senior unsecured creditors are subject to low subordination risks.
BASE-CASE ASSUMPTIONS
? Revenues are projected to hover around THB106-THB108 billion in 2021-2023.
? EBITDA margin to stay at around 12%-13% in 2021-2023.
? Total capital spending of THB7 billion in 2021 and THB10-THB12 billion per year in 2022-2023.
RATING OUTLOOK
The ?stable? outlook reflects TRIS Rating?s expectation that MPSC will maintain its leading position in both the Thai and Chinese sugar industries. MPSC? s competitive edges from its diverse range of operations, and sources of income should alleviate the volatile effects in the sugar production business.
RATING SENSITIVITIES
The ratings on MPSC could be upgraded if the company is able to improve its operating cashflow and lower its leverage, with the net debt to EBITDA ratio staying below 5 times on a sustained basis.
On the contrary, MPSC?s ratings could be downgraded if in a scenario of materially higher-than-expected debt levels or weaker-than-expected profitability, that could potentially result in the company?s adjusted debt to EBITDA ratio exceeding 8 times for a sustained period.
COMPANY OVERVIEW
Founded in 1946 by the Vongkusolkit family, MPSC is the leading sugar producer in Thailand. 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, the Lao PDR, and Australia. Owing to severe drought and lower plantation areas, MPSC?s sugar production plunged to 3.7 million tonnes in the 2020/2021 growing season, compared with 4.6 million tonnes in the 2018/2019 growing season. About 45% of MPSC?s sugar volume was produced in Thailand and 25% in China.
In 2017, MPSC entered the sugar refining business in Indonesia through a joint venture with OLAM International Ltd. (OLAM), a leading food and agri-business company. In 2020, MPSC increased its stake by acquiring the remaining 50% share from OLAM. Additionally, MPSC invested in two joint-venture companies which own a sugar mill and a refinery in Java. At the end of September 2021, the total investment cost was worth about THB13 billion. Following the sizable investments, MPSC owns a refinery and holds a 60% equity stake in a sugar mill and a 40% stake in a refinery. The total sugar volume was 0.6 million tonnes in 2021.
Although sugar is a commodity, MPSC is striving to build a brand in order to differentiate its products from those of its competitors. MPSC?s retail products are successfully marketed under the ?Mitr Phol? brand in Thailand. The company aims to distribute its branded sugar products in other markets in the Asia-Pacific region.
MPSC also produces electricity, ethanol, wood-substitute materials, and fertilizer, and offers logistics services. During the first nine months of 2021, its total sales were THB73.6 billion. The sugar segment accounted for 70% of its total revenues while the power and ethanol segments together comprised 20%.
MPSC owns 17 power plants. Fourteen plants are located in Thailand, while the remaining three plants are in China (Funan, Ningming, and Chongzuo). The company sold electricity to the Electricity Generating Authority of Thailand (EGAT) and the Provincial Electricity Authority (PEA) under the Small Power Producer (SPP) scheme, totaling 272.8 MW in 2021. Additionally, MPSC holds investments in several other power plants, including solar floating power plants in Taiwan and a solar farm in Srakaew province.
RELATED CRITERIA
- Key Financial Ratio and Adjustments for Corporate Issuers, 11 January 2022
- Issue Rating Criteria, 15 June 2021
- Rating Methodology ? Corporate, 26 July 2019
Mitr Phol Sugar Corporation Ltd. (MPSC)
Company Rating: A
Issue Ratings:
MPSC229A: THB2,000 million senior unsecured debentures due 2022 A
MPSC22OA: THB2,000 million senior unsecured debentures due 2022 A
MPSC233A: THB2,500 million senior unsecured debentures due 2023 A MPSC236A: THB2,610 million senior unsecured debentures due 2023 A MPSC249A: THB3,200 million senior unsecured debentures due 2024 A MPSC256A: THB2,400 million senior unsecured debentures due 2025 A MPSC256B: THB2,210 million senior unsecured debentures due 2025 A MPSC259A: THB1,000 million senior unsecured debentures due 2025 A MPSC26DA: THB1,900 million senior unsecured debentures due 2026 A MPSC286A: THB1,630 million senior unsecured debentures due 2028 A MPSC28DA: THB2,200 million senior unsecured debentures due 2028 A MPSC306A: THB3,650 million senior unsecured debentures due 2030 A MPSC31NA: THB3,000 million senior unsecured debentures due 2031 A MPSC33NA: THB2,150 million senior unsecured debentures due 2033 A Rating Outlook: Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: +66 0 2 098 3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2022, 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 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 www.trisrating.com/rating-information/rating-criteria