Bangkok--17 Sep--TRIS Rating
TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt1,000 million in senior unsecured debentures of Khon Kaen Sugar Industry PLC (KSL). At the same time, TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of KSL at “A”. The outlook remains “stable”. The “A” ratings reflect the company’s long track record in the sugar and sugarcane industry as one of the leading sugar producers in Thailand and its diversification into sugar-related businesses. The ratings also take into consideration the current low level of sugar prices worldwide, the company’s exposure to the regulatory and operational risks of its sugar operations in the Lao People’s Democratic Republic (Lao PDR) and Cambodia, as well as the volatility of the supply of sugarcane. The “stable” outlook reflects TRIS Rating’s expectation that KSL will maintain its competitive position in the Thai sugar industry. Revenue sharing system of the sugar industry, strong demand for ethanol, and reliable income from power businesses will be a cushion for the company during the down cycle of the sugar industry.
KSL is one of the leading sugar producers in Thailand, established in 1945 by the Chinthammit family and associates. As of April 2014, the Chinthammit family collectively held 70.0% of the company’s shares. The company owns and operates five sugar plants in Thailand, with a combined cane crushing capacity of 103,666 cane tonnes per day in 2013/2014 growing season. KSL Group procured 8.5 million tonnes of sugarcane in the 2013/2014 season and produced 906,122 tonnes of sugar. KSL’s sugar production volume in the 2013/2014 season ranked it fourth in the industry, with a market share of 8.0%, following the Mitr Phol Group (20.3%), the Thai Roong Ruang Group (15.5%), and the Thai Ekkalak Group (9.3%).
Since fiscal year (FY) 2006, KSL expanded along the sugar value chain to maximize the utilization of sugarcane. KSL’s sugar-related businesses include generating electricity and producing ethanol. During FY2013 and the first nine months of 2014, revenue from the energy segment (electricity and ethanol) accounted for 22% of total sales.
Apart from producing and selling sugar in Thailand, KSL also operates sugar plants in the Lao PDR and Cambodia. The plants in the Lao PDR and Cambodia started commercial production in FY2010. The yield in these two nations has been low for years, as a result of ongoing troubles with cane disease. In the 2013/2014 season, however, the sugarcane yield rose significantly. In the Lao PDR and Cambodia, the yield improved from an average of 2.9 tonnes of cane per rai to 7.9 tonnes of cane per rai. However, the export price of raw sugar to the European Union (EU) fell sharply. The export price tumbled by 35% during the first nine months of FY2014 due to an oversupply situation in the EU. As a result, KSL’s operations in the Lao PDR and Cambodia continued to report losses. The combined loss totaled Bt97 million in the first nine months of FY2014.
During the first nine months of FY2014, total revenues was Bt12,200 million, down by 20% over the same period of FY2013 (y-o-y). The drop was mainly due to a 23% y-o-y decline in total sugar volume sold, to about 460,000 tonnes in the first nine months of 2014. Some export customers delayed their shipments to the end of FY2014. However, KSL’s operating profit margin before depreciation for the first nine months of FY2014 improved to 24.1%, compared with 14.7% during the first nine months of FY2013. This was because of falling production cost of sugar from higher cane crushing yield, on the back of favorable weather in FY2014 and no major mechanical problem during the production. The favorable margin was also supported by strong margin of ethanol and power segments. The improved profitability resulted in modest increase in earnings before interest, tax, depreciation, and amortization (EBITDA) even though total revenues declined. KSL’s EBITDA during the first nine months of FY2014 slightly improved to Bt3,158 million, from Bt 2,998 million over the same period of FY2013. EBITDA interest coverage remained satisfactory at 5.11 times in the first nine months of 2014.
KSL’s financial leverage was seasonally high with a debt to capitalization ratio of 64.15%. KSL’s leverage is expected to improve at the end of FY2014. During FY2014-2016, KSL’s capital expenditures are set at Bt2,000 million to Bt3,000 million per year in case of receiving the operating permit to relocate the KSL’s sugar plant from Chonburi to Sa Kaeo province. With expected EBITDA of approximately Bt4,000 million per year and moderate investments, the company’s leverage is expected to remain below 60% in the medium term, given the down cycle of sugar industry.
Sugar prices are expected to remain soft for the next 12 months because sugar inventories remain high around the world. The United States Department of Agriculture (USDA) estimated that world sugar supply exceeded demand by 1.5 million tonnes in 2013/2014, the fourth consecutive year surplus. For the 2014/2015 growing season, the USDA forecasted that worldwide production would be flat at 175.6 million tonnes. Production drops in Brazil, China, Pakistan, and Thailand are expected to outpace rising production in India, the Former Soviet Union, the European Union and North America. USDA projected demand for sugar would be 1.1 million tonnes higher than supply in the 2014/2015. If true, this would be the first time in five years that demand has outpaced supply. However, abundant sugar inventories, which were estimated at about 45.5 million tonnes by USDA, would keep sugar prices low for the foreseeable future.
Khon Kaen Sugar Industry PLC (KSL)
Company Rating: A
Issue Ratings: KSL14DA: Bt1,500 million senior unsecured debentures due 2014 A
KSL15DA: Bt1,000 million senior unsecured debentures due 2015 A
KSL174A: Bt1,000 million senior unsecured debentures due 2017 A
KSL198A: Bt1,000 million senior unsecured debentures due 2019 A
Up to Bt1,000 million senior unsecured debentures due within 2019 A
Rating Outlook: Stable