TRIS Rating Upgrades Company Rating of “STA” to “A-” from “BBB+” With “Stable” Outlook

TRIS Rating Co., Ltd. has upgraded the company rating of Sri Trang Agro-Industry PLC (STA) to

“A-” from “BBB+” with “stable” outlook. The upgrade reflects STA’s strengthened financial profile following an initial public offering (IPO) in Singapore Stock Exchange (SGX) in January 2011, and its improved operating performance. The rating also takes into consideration the company’s leading market position in the natural rubber business, geographically diverse customer base, successful strategies to partially mitigate price risk of natural rubber (NR), and its in-depth knowledge of the NR industry. However, these strengths are partially offset by fluctuations in the price of NR, and weakened prospects in the developed economies.

The “stable” outlook reflects the expectation that STA will sustain its good operating performance through the industry cycles. The company is also expected to maintain sufficient liquidity and financial flexibility to withstand the high volatility of the NR industry and uncertainties in the world economies.

TRIS Rating reported that STA is a leading processor and merchandiser of natural rubber in Thailand. The company has 19 processing plants located in the southern and northeastern parts of Thailand and two plants in Indonesia. As of March 2011, the company’s total processing capacity was 977,020 tonnes per year. The company’s market share in the global NR industry in the first three months of 2011 was 9.78%, up from 7.85% in 2010. Based on years of experience in the NR industry and well-rounded information on NR positions, the management team has been able to manage the company through the peak and troughs of various business cycles while sustaining its strong market position. For the first three months of 2011, total shipments were 251,361 tonnes, up 19.9% from the same period of the prior year. Approximately 84% of its products are sold directly to end-users, mostly tire manufacturers. Although sales are concentrated in a single industry, STA is fairly diversified in terms of geography and its customer base. The company also expanded its customer base to include small- and medium-sized tire manufacturers. Exports accounted for 85% of total sales volume in the first three months of 2011. China was the largest export market, accounting for 42% of export sales volume.

TRIS Rating said, the current world’s major NR producing nations are Thailand, Indonesia, and Malaysia. In 2010, these three countries accounted for 66% of global production of 10.29 million tonnes. Thailand was the largest producer, with total production volume of 3.07 million tonnes, followed by Indonesia (2.83 million tonnes) and Malaysia (0.94 million tonnes). Approximately 70% of NR is consumed by the tire industry. The remaining 30% is mainly used in surgical gloves, condoms, and footwear industries. Global NR consumption in 2010 was 10.67 million tonnes, a 13.2% year-on-year (y-o-y) growth after a sharp fall in 2009 due to the global financial crisis, credit crunch, and the resulting slump in consumer consumption. A rebound in NR consumption was driven by a recovery in the US market and increasing demand in emerging markets especially China and India.

TRIS Rating mentioned about the raw material costs of rubber that they account for approximately 95%-98% of the rubber processing costs. Processors are thus 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 has adjusted its marketing policy to employ a back-to-back selling and buying strategy. The company also strives 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 steadily improving operating performance over the past few years. Both sales and net profit hit record highs, underpinned by higher NR prices and a greater number of shipments. STA’s average selling price in 2010 was Bt97.7 per kilogram (kg.), up 66% y-o-y. The price continued to rise in the first six months of 2011 to an average of Bt145.7 per kg. The price rise came from increasing demand for NR and supply constraint due to unfavorable weather conditions. In terms of volume, STA’s shipments grew by 15% y-o-y to 485,664 tonnes in the first six months of 2011, outpacing the growth in world consumption. The operating margin before depreciation increased to 3.79% in 2010 and 4.06% during the first six months of 2011. Funds from operations (FFO) surged to Bt2,709 million, a rise of 2% y-o-y, despite higher tax payment and lower dividend income from its subsidiaries.

STA’s capital structure has strengthened. Its equity base increased from Bt10,415 million as of December 2010 to Bt19,071 million as of June 2011, following a successful IPO in SGX in January 2011. The debt to capitalization ratio improved from 69.12% as of December 2010 to 51.99% as of June 2011, said TRIS Rating. -- End

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