TRIS Rating Co., Ltd. has assigned the company rating of Sri Trang Agro-Industry PLC (STA) at “BBB+” with “stable” outlook. The rating reflects STA’s strong market position in the natural rubber business, geographic diversity in terms of sales, hedging and back-to-back buying and selling strategy to partially mitigate price risk, in-depth knowledge of the natural rubber (NR) industry, and capable management. However, these strengths are partially offset by the natural rubber price fluctuations, highly competitive market conditions, and STA’s high financial leverage, although partially mitigated by liquid marketable inventories.
The “stable” outlook reflects the expectation that STA will be able to maintain its strong market position in the NR business and has sufficient back up credit facilities from financial institutions. The company is expected to refrain from rubber price speculation, implement a conservative financial strategy and maintain the effective working capital management during a difficult industry environment.
TRIS Rating reported that STA is a processor and trader of natural rubber. The company has 15 processing plants located in the south of Thailand and one in Indonesia with total capacity of 746,543 tonnes per year. The company’s market share in the global NR industry in the first three months of 2009 was 8.14% with trading volume of 166,317 tonnes, up from 7.46% in the same period of the prior year. Due to years of experience in the NR industry, STA’s management has been able to manage the company through the business cycles and has been able to sustain STA’s market position. Approximately 82% of its products were sold to the tire manufacturing industry; four of STA’s top five customers are tire manufacturers. Although sales are concentrated in a single industry, it is fairly diversified in terms of geography. The company also expanded customer base to small- and medium-sized tire manufacturers. Exports accounted for 79% of total sales in 2008. Approximately 62% of export sales were to customers in Asia; mainly China, Singapore, Japan and Korea; and about 10% and 9% were to customers in Europe and the US.
TRIS Rating said, currently the world’s major NR producers are Thailand, Indonesia and Malaysia. In 2008, the three countries accounted for 70% of global production of 9.9 million tonnes. Thailand was the largest producer, with total production volume of 3.09 million tonnes, followed by Indonesia (2.75 million tonnes) and Malaysia (1.08 million tonnes). NR is used as a raw material in various industries, including tires, surgical gloves, condoms, and footwear. Global NR consumption has grown steadily during the past decade. However, in 2008, global NR consumption declined to 9.7 million tonnes, compared with 9.9 million tonnes in 2007. Demand for NR declined sharply in the fourth quarter of 2008 due to the automotive industry slump which suffered from the credit crunch and the economic downturn. A sharp decline in vehicle demand also affected tire demand. Tire manufacturers were by far the largest end-users of NR, as they consume approximately 70% of global production.
TRIS Rating said about the NR processing industry that it is labor intensive. Raw material costs account for approximately 90%-95% of the processing costs. Processors are highly exposed to volatile NR prices, and as a result, earnings and cash flow tend to fluctuate. To mitigate price risk and stabilize earnings and cash flow, STA adjusted its marketing strategy to the back-to-back selling and buying strategy and to have more direct contact with end-users and farmers. However, price risk is unavoidable during periods of high rubber price volatility.
STA reported a solid operating performance in 2008 despite an abrupt decline in sale volume and a collapse of NR prices in the fourth quarter of 2008. Net profit was Bt1,315 million before provision for diminution in value of inventories of Bt688 million. The profit was the highest for the past five years. Operating margin before depreciation expense was 3.29%, up from 1.4% in 2007. However, adjusted operating margin before depreciation (excluding reversal on diminution in value of inventories) in the first half of 2009 was 0.15%, down from 3.15% in the same period of the prior year. The lower margin reflected the high-cost inventories carried forward from 2008. Nonetheless, it is expected that the operating margin for the rest of the year will be back to normal as all high-cost inventory was sold in the first quarter of 2009. As of June 2009, total debt was Bt8,327 million, down from Bt13,085 million as of June 2008. The total debt to capitalization ratio was 58.50%, down from 73.52% as of June 2008. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio in the first half of 2009 improved to 5.59 times, compared with 4.09 times in the same period of the prior year due to declining debt levels as well as falling interest rates, said TRIS Rating. -- End
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