TRIS Rating Co., Ltd. has assigned a company rating of "BBB" to Advance Agro PLC, which reflects the company's strong position as the largest printing & writing paper (P&W paper) and short fiber pulp producer in Thailand and its fully integrated and efficient plant facility. The rating also takes into consideration increasing demand for pulp and paper in both the domestic and export markets and the company's lower financial constraints following the conclusion of a second round of debt restructuring in August 2003. However, these strengths are partially offset by Advance Agro's leverage, which remains high, price volatility in the pulp and paper industry, and the company's limited product line compared with its major competitors. While the "stable" rating outlook reflects that expectations of improving operating performance together with benefiting mainly from the favorable pulp and paper demand worldwide should enable Advance Agro to improve its financial status, which is currently weak compared with its rating. However, if trends in the pulp and paper market were to turn negative, the rating would need to be revised as the company's financial flexibility is relatively low. The outlook also assumes that Advance Agro will use cash surplus mainly to prepay its outstanding debt obligations.
TRIS Rating reported that the Thai baht depreciation in 1997 left Advance Agro with a very high debt burden which caused the company and its subsidiaries to enter into a debt restructuring agreement with three local banks in 2000. Advance Agro also failed to pay $28 million of its convertible debentures on the maturity date of 17 June 2001. However, these debentures were fully repaid within six months after the default date with the consent of the debentureholders. In addition, the company could not maintain its financial ratio covenants and entered into another debt restructuring agreement, the Master Override Agreement (MOA), with three local banks in June 2003. Under the MOA, the maturity of Advance Agro's Bt16,000 million total debt, including the guarantee facilities made available by the three local banks to the Debtors to secure the Export Credit Agency (ECA) debts, was extended by nine years, to 2012, with a one-year grace period for its installment due in 2007, when the company has to retire $48.72 million of high-yield notes. The company's repayment schedule with the banks is expected to be sufficiently funded by its internal cash generation. As of September 2004, Advance Agro has already prepaid Bt1,766 million of its debt.
TRIS Rating said that domestic demand for pulp has grown continuously, even during the crisis in 1997. However, demand for P&W paper briefly declined during 1997-1998 from 425,000 tons in 1996 to 397,000 tons in 1997 and 356,000 tons in 1998 before picking up in 1999 and steadily increasing thereafter. The average annual growth rates of demand for pulp and P&W paper during 1999-2003 were 6% and 12%, respectively. Domestic demand growth for pulp was around 12.1% in 2003 while growth for P&W paper was 8.8%. International demand has also increased during the past few years due to increasing demand from China.
Advance Agro has a relatively limited product line compared with its major competitors since its focus is only on the production of P&W paper. However, it has several advantages due to its fully integrated production facility. Its pulp and paper mills are located in one single location at Tha Toom, Prachinburi province, which is close to the eucalyptus plantation area of its related company, Agro Lines Co., Ltd., which has a long-term supply contract with the company to avoid raw material shortages. In addition, its complex is in the area that is convenient for transportation. In 2003, more than 50% of its bleached eucalyptus pulp was used by its paper mills for the production of P&W paper; only 5% of pulp was sold domestically. The balance was exported to several countries including Australia, China, Korea, and Malaysia. At the end of the first six months of 2004, Advance Agro had Bt17,423 million of debt, declining from Bt19,144 million in 2003 and Bt19,990 million in 2002. However, its debt to capitalization remained high at 66.9% at the end of June 2004. Its earnings and profitability are relatively volatile, with earnings before interest, tax, depreciation and amortization (EBITDA) margin ranging from 20%-42% over the past five years. In the first half of 2004, the EBITDA margin declined to 21%, down from about 26% for the same period last year, as a result of higher raw material prices. However, the increasing demand for pulp and paper in both domestic and international markets and lower interest expenses helped strengthen cash flow. During the first half of 2004, funds from operations was as high as Bt1,635 million, an increase of 43% from the same period last year, TRIS Rating said. - End
Advance Agro PLC Company Rating: BBB Rating Outlook: Stable