TRIS Rating Co., Ltd. has announced a “BBB” company rating affirmation with “stable” outlook to Advance Agro PLC (AA). The rating reflects AA’s position as the leading short-fiber pulp and printing & writing paper (P&W paper) producer in Thailand, a fully integrated and efficient plant, the relatively strong brand name of its Double A paper products, and an improving capital structure. However, these strengths are partially offset by the inherent price volatility in the pulp and paper industry, the exposure to foreign exchange risk, the effect of the global economic slowdown on operating performance, the near-term plan for large capital expenditures, and concern over the company’s ability to prudently manage its finances to satisfy loan covenants.
The “stable” outlook reflects the expectation that AA’s operating performance will recover in the short to medium term once demand recovers. The debt to equity ratio is expected to remain at around 40%-50% despite the investment in PM#3. The outlook also takes into consideration the management commitment to disclose financial and operating performance data and minimize unnecessary related-party transactions. In addition, the outlook has incorporated the divestment of the power plants, which helps improve liquidity and resolves the covenant breaches.
TRIS Rating reported that AA is the leading pulp and P&W paper producer in Thailand. The company owns two pulp mills, with a total production capacity of around 580,000 tonnes per annum (tpa), and three paper processing machines that provide total capacity of around 558,000 tpa. Around 70%-80% of pulp production is used internally for its paper mills; the remainder is sold in domestic and export markets. AA is the major exporter of short-fiber pulp in Thailand, exporting around 143,808 tonnes of dried pulp in 2007 and 82,856 tonnes in 2008. Export sales of pulp dropped by more than 40% year-on-year (y-o-y) in 2008 due mainly to the sharp price rise in the third quarter of 2008, following the fuel price hikes in the first nine months of 2008. The price rise and the global economic slowdown in the last quarter of 2008 led to a sharp drop in demand. The sales volume of paper products in 2008 also dropped, falling by 6.5% from the previous year, due mainly to a drop in exports. However, as the selling price of the Double A Paper brand held firm, the value of P&W paper sold in 2008 dropped less than 1% y-o-y. In contrast, the selling price of pulp and folio paper has dropped significantly since the fourth quarter of 2008 due to the commodity-like nature of these products.
TRIS Rating said, as of March 2009, AA’s outstanding debts were Bt10,643 million, down from Bt12,038 million at the end of 2008. Short-term borrowings accounted for around 40% of total debt. Most of the short-term borrowings were trade finance. The major portion of the long-term loans is 11% notes which will mature in 2012. The outstanding balance of the 11% notes is US$160.59 million. AA’s loan agreements contain certain restrictive covenants covering mergers, disposal of assets, payment of dividends, prohibition of creating liens over fixed assets, and maintenance of financial ratios. At the end of 2008, the company breached some of the financial ratio covenants in its loan agreements with local banks. The company has already received a waiver from a bank and is waiting for a waiver from another bank. In addition, the company signed a sale and purchase agreement to sell three power plants to National Power Supply Co., Ltd. (NPS), a related company, on 28 June 2009. The sale will help improve liquidity and resolve the financial covenants breaches.
At the end of March 2009, AA’s total debt to capitalization ratio was around 44%, higher than projected since the company repurchased 9.21% of its outstanding shares in 2H2008. AA paid Bt39 per share or around Bt1,912.9 million in total, cutting the equity base by the same amount. The debt to capitalization ratio is not expected to decrease in the near future since the company plans to invest around US$200 million in the third paper mill (PM#3), with a production capacity of 210,000 tpa. The company plans to finance this project with around US$100 million in debt and the balance from operating cash flow plus the proceeds from the divestment of the power plants. Funds from operations (FFO) in the first quarter of 2009 dropped by 53% y-o-y to Bt436 million, mainly due to a sharp drop in the profit margin of pulp and the decrease in paper sales in terms of volume and value. However, FFOs in the first quarter of 2009 were much better than the recorded -Bt87 million in the fourth quarter of 2008. In May 2009, pulp prices started to increase gradually. Thus, operating performance is expected to bottom out in the second half of 2009. -- End
Company Rating: Affirmed at BBB Rating Outlook: Stable
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