TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt1,500 million in senior unsecured debentures of Sri Trang Agro-Industry PLC (STA). At the same time, TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of STA at “A-”. The outlook remains “stable”. The ratings reflect the company’s leading position in the natural rubber (NR) industry, diversified customer base, and the extensive track record of its management team. However, these strengths are partially offset by the cyclical nature of NR prices and narrow margin of mid-stream NR producers. The NR demand slowdown from weak global economic condition remained the rating concerns.
The “stable” outlook reflects the expectation that STA will maintain its competitive position in the NR industry. The company is also expected to manage its liquidity and maintain a balance sheet strong enough to withstand the prolonged down cycles of the NR industry.
STA’s credit upside potential is limited as long as rubber prices remain low. The credit downside risk could occur if rubber prices continue to slump, resulting in weak profitability and debt serviceability for an extended period. An aggressive debt-funded investment is also the negative factor for STA’s credit ratings.
STA is one of the world’s leading processors and merchandisers of NR. Currently, the company has 26 processing plants located in Thailand, three plants in Indonesia, and one in Myanmar. As of 31 December 2015, the company’s total processing capacity was 1,467,544 tonnes per year. The company’s market share in the worldwide NR industry in 2015 was 9.1%. Approximately 80% of its products are sold directly to end-users, which are mostly tyre manufacturers. Exports accounted for 84% of STA’s total sales volume in 2015. China was the largest export market, accounting for 44% of export volume.
Currently, the major NR producing nations are Thailand, Indonesia, Vietnam, and Malaysia. In 2015, these four countries accounted for 76% of the 12.3 million tonnes of NR produced worldwide. Thailand was the largest producer, with a total production volume of 4.47 million tonnes, followed by Indonesia (3.18 million tonnes), Vietnam (1.02 million tonnes), and Malaysia (0.70 million tonnes). In terms of consumption, demand for NR worldwide grew at an average of 2.7% per annum over 2010-2015, climbing from 10.79 million tonnes in 2010 to 12.35 million tonnes in 2015. China consumes around 39.0% of the amount of NR produced worldwide. Worldwide NR consumption slightly rose by 1.8% in 2015 on the back of a worldwide economic slowdown and tumbling crude oil prices. International Rubber Study Group (IRSG) reported that NR consumption exceeded production by 81,000 tonnes in 2015.
Raw material costs account for 93%-98% of the rubber processing costs for a NR producer. Processors, including STA, are thus exposed to volatile NR prices, and as a result, earnings and cash flow fluctuate significantly. STA’s operating margin before depreciation (excluding a reversal on the diminution in value of inventories) hovered between 0.64%-3.79% during 2010-2014. Earnings before interest, tax, depreciation, and amortization (EBITDA) ranged between Bt1,490-Bt4,945 million during the same period.
In 2015, STA’s performance continued to be overcastted by falling NR prices. STA’s total revenue declined to Bt61,292 million, a 19% year-on-year (y-o-y) drop. The drop was mainly due to a 19.4% decline in NR prices and a 7.0% drop in STA’s NR volume. STA shipped 1,119,966 tonnes of NR to its customers in 2015. The drop in shipments came from a 6.1% decline in exports, especially to China. Export to China, which accounted for 52% of total export volume, declined by 15% y-o-y in 2015. STA’s average selling price in 2015 dropped by 19.4% y-o-y in line with the NR prices worldwide. This was because worldwide demand for NR grew at a slower rate amidst global economic uncertainty. Despite a drop in prices of rubber products, the company’s operating margin before depreciation rose to 2.02%, compared with 0.64% in 2014. This was partly due to the company’s focus more on profitability and the lesser volatility of rubber price in 2015 than in 2014. Including realized gain from foreign exchange and derivatives, EBITDA rose to Bt3,221 million in 2015, a 33.9% y-o-y increase. The funds from operations (FFO) in 2015 was relatively flat at Bt1,873 million, compared with 2014 figures.
STA’s balance sheet was moderate. Total debt rose to Bt19,126 million as of December 2015, from Bt13,975 million as of December 2014. The total debt to capitalization ratio increased to 47.27% at the end of December 2015, from 40.43% at the end of 2014. An increase in STA’s total debt came mainly from a rise in working capital. Cash flow protection remained acceptable despite the current industry down cycle. The EBITDA interest coverage ratio was 3.76 times 2015, compared with 3.63-3.71 times in 2013-2014. FFO to total debt ratio declined to 9.79% in 2015, compared with 14.06%-16.46% in 2013-2014. STA’s financial flexibility remains good, backed by cash on hand, back-up credit facilities from commercial banks, and liquid marketable inventory. As of December 2015, the company had Bt2,197 million of unrestricted cash and marketable securities. The company also had Bt13,960 million in inventory value.
During 2016-2018, STA’s plans to spend Bt500-Bt1,500 million per annum in capital expenditures, primarily to build rubber processing plants in Thailand and abroad. STA’s EBITDA is forecasted at Bt2,500-Bt2,700 million per year. TRIS Rating expects that STA’s capital expenditures can be financed mainly by its operating cash flow. The total debt to capitalization ratio will be approximately 40%-45%. FFO to total debt is expected to linger around 15% in the medium term.
Up to Bt1,500 million senior unsecured debentures due within 2021 A- Rating Outlook: Stable
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