TRIS Rating upgrades the company rating on Betagro PLC (BTG) and the ratings on its senior unsecured debenture to ?A? from ?A-? with a ?stable? outlook. The upgrade reflects BTG?s strengthened capital structure, following its initial public offering (IPO) and listing on the Stock Exchange of Thailand (SET), together with its sound operating performance on the back of a substantial increase in livestock prices. We view the momentum of high meat prices to continue in 2023 before gradually softening in 2024.
The ?stable? outlook reflects our view of the company?s ability to maintain its business position and its financial profile as measured by the ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) below 4 times on a sustained basis.
The ratings are underpinned by BTG?s leading position in the Thai agribusiness and food industries. The ratings also factor in several industry risk factors, such as the cyclicality of commodity-type products, volatile raw material prices, animal disease outbreaks, and trade barriers. However, BTG?s vertically integrated product lines, and its strategy to focus on value-added and branded products alleviate these concerns to some extent.
Key Rating Considerations
Substantial strengthening in capital structure
In November 2022, BTG completed its IPO with proceeds of approximately THB17.5 billion and listing on the SET. About 50% of this capital injection will be used for repayment of existing debts and the remainder is slated for capacity expansion and working capital needs.
At the end of September 2022, BTG?s debt to EBITDA ratio dropped sharply to 2.2 times from 5.6 times at year-end 2021. With the fresh capital and capital expenditures of THB3-THB5 billion per annum, BTG?s net debt to EBITDA ratio is projected to improve substantially to 1.5 times in 2022 and stay in the range of 2.5-3.9 times in 2023-2024, while the debt to capitalization ratio should stay below 50% in 2022-2024.
Good operating performance amid higher livestock prices
BTG reported satisfactory operating results in the first nine months of 2022, despite a steep rise in grain costs. The improvement was mainly driven by skyrocketing livestock prices. During the first nine months of 2022, average prices of swine and chicken surged by 32.7% and 28.6% year-on-year (y-o-y), respectively, according to data from Thai Feed Mill Association. Swine prices surged on the back of supply shortages following an outbreak of African swine fever (ASF) in Thailand. Prices of chicken also escalated due to rising demand as a pork substitute and demand from export markets.
For the first nine months of 2022, BTG?s operating revenue soared by 32.7% y-o-y to THB83.2 billion. EBITDA surged to THB10.6 billion, compared with THB3.5 billion during the same period of 2021. The EBITDA margin was 12.8%, compared with 6.6%-8.9% in 2019-2021.
TRIS Rating expects BTG to continue delivering sound operating results in the coming years. Although feed costs and inflation remain high, we believe the company should further benefit from high meat prices, driven by the ongoing supply shortage, as well as from escalating demand boosted by the revival of tourism and food security concerns globally.
We project BTG?s operating revenue to climb to THB103-THB110 billion per annum during 2022-2024. The EBITDA margin is projected to hit 11.8% in 2022, before normalizing to 5.3%-7.9% in 2023-2024. EBITDA is projected to reach THB12.7 billion in 2022 and THB5.5-THB8.7 billion per annum in 2023-2024.
Adequate liquidity
We assess BTG?s liquidity to be adequate over the next 12 months. Funding needs will include THB2.8 billion maturing debentures and capital expenditures of THB4.7 billion. The primary source of repayment is expected to come from funds from operations (FFO) of THB7 billion in 2023. The liquidity buffer is supported by cash reserves, amounting to THB1.3 billion at the end of September 2022, as well as proceeds from the IPO and numerous undrawn credit facilities from several financial institutions.
The key financial covenant on BTG?s debentures requires maintenance of an interest-bearing debt to equity ratio below 2 times. BTG?s net debt to equity ratio is projected to below 1 times at the end of 2022. We expect the company to remain in compliance with the covenant over the forecast period of 2022-2024.
Leader in Thailand?s agribusiness and food industries
BTG has been a leader in the agribusiness and food industries for 55 years. BTG is the third-largest poultry processor in Thailand with a market share of 11% in 2021, trailing Charoen Pokphand Foods PLC (21%) and Saha Farm Co., Ltd. (12%). Its share of chicken exports from Thailand was around 8% in 2021, according to data from the Thai Broiler Processing Exporters Association. BTG is also an industry-leading producer of high-quality pork products in Thailand, with approximately 10% share of the domestic supply of pork products.
BTG?s chicken and swine operations are fully vertically integrated, from feed to food products. BTG produces feed, breeds and farms livestock, and processes meat. Livestock are raised in-house and via contract farming. Through vertical integration, the company can control the quality and costs of the production processes. BTG has a broad portfolio of products, covering animal feed, poultry, swine, and food products. The diverse range of products helps mitigate BTG?s operational risks. During the first nine months of 2022, feed, farm, and food products contributed about 24%, 61%, and 12% of total sales, respectively.
Focus on value-added and branded products
BTG?s key strategy is to focus on value-added and branded products. This strategy should help increase its profit margin and partly mitigate the effect of price fluctuations inherent in commodity-like farm products. During the first nine months of 2022, value-added food products comprised 12% of total sales. Additionally, BTG has established a food innovation center for research and product development. It plans to launch more value-added products in the years ahead.
The company?s promotional efforts support its branded products. Brand recognition gives BTG an advantage as consumers tend to choose trusted brands. BTG has several well-known brands such as ?S-Pure? and ?Betagro? for hygienic meat and food, ?ITOHAM? for premium sausage, ?Better Pharma? for drug and animal health, ?Perfecta?, ?DOG n joy?, and ?CAT n joy? for pet food products.
BASE-CASE ASSUMPTIONS
? Operating revenue to increase by 24% to THB108 billion in 2022 and THB103-110 billion in 2023-2024.
? Gross profit margin to be 19.4% in 2022 and 14%-16% range in 2023-2024; EBITDA margin to be 11.8% in 2022 and 5.3%-7.9% range in 2023-24
? Total capital spending to be THB2.7 billion in 2022 and THB4.7-THB5.0 billion per annum during 2023-2024.
RATING OUTLOOK
The ?stable? outlook reflects our view that BTG will be able to maintain its leading positions in the Thai agribusiness and food industries. The company?s strategy of focusing on biosecurity and digital transformation, as well as its value-added product offerings, should improve the company?s competitive position and operating performance over the next few years.
RATING SENSITIVITIES
BTG?s ratings could be upgraded if the company is able to significantly enlarge its cashflow while maintaining a strong balance sheet. On the contrary, downward rating pressure would emerge if BTG?s operating performance deteriorates significantly, or the company undertakes any sizeable debt-financed investments which would weaken its balance sheet and cash flow protection. A rating downgrade could occur if its ratio of adjusted debt to EBITDA increases above 4 times on a sustained basis.
COMPANY OVERVIEW
BTG was established in 1967 by the Taepaisitphongse family and its associates. The company successfully raised funds via an IPO on the SET in November 2022. The Taepaisitphongse family remains the major shareholder, holding approximately 66% stake, as of November 2022.
The company has three major business segments: feed, farm, and food. Farm products (breeding stock, live animals, and raw meat) contributed 61% of sales during the first nine months of 2022, followed by animal feed (24%), food products (semi-cooked meat, cooked meat and ready-to-eat products, 12%), and other products (2%). In terms of product category, revenue from poultry products comprised 39% of BTG?s total sales, followed by swine (29%), feed (24%), animal health (3%), sausage and meatball (2%), and others (2%).
Fully integrated operations help BTG?s products meet international standards, qualifying the company to export to Japan and the European Union (EU). Exports constituted 12% of total sales in the first nine months of 2022, while domestic sales accounted for 88%.
Apart from Thailand, BTG has expanded its footprint into Cambodia and the Lao People's Democratic Republic (Lao PDR). BTG?s overseas operations cover feed plants and farms. Revenue from overseas operations accounted for 5% of total revenue in the first nine months of 2022, but this figure is expected to increase gradually.
RELATED CRITERIA
- Corporate Rating Methodology, 15 July 2022
- Key Financial Ratios and Adjustments for Corporate Issuers, 11 January 2022
- Issue Rating Criteria, 15 June 2021
Betagro PLC (BTG)
Company Rating: A
Issue Ratings:
BTG233A: THB2,000 million senior unsecured debentures due 2023 A
BTG238A: THB800 million senior unsecured debentures due 2023 A
BTG247A: THB1,000 million senior unsecured debentures due 2024 A
BTG248A: THB1,000 million senior unsecured debentures due 2024 A
BTG258A: THB2,200 million senior unsecured debentures due 2025 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