TRIS Rating has affirmed the company and current senior unsecured debenture ratings of Betagro PLC (BTG) at “A” with “stable” outlook. The ratings reflect the company’s proven record in the Thai agribusiness and food industries, full vertical integration across its diverse product lines, and focus on value-added and branded products. These strengths are partially offset by the inherent cyclicality of the commodity-type products BTG sells and the volatile prices for grain, the major raw material, the exposure to disease outbreaks, as well as changes in tariffs of importing countries.
The “stable” outlook reflects TRIS Rating’s view that BTG will be able to maintain its leading positions in the Thai agribusiness and food industries. BTG is expected to manage its total debt to capitalization ratio to below 50% during expansion.
BTG’s ratings and/or outlook would be revised upward if BTG’s cash flow generation improves significantly on sustainable basis while capital structure and debt serviceability do not deteriorate from the current levels. In contrast, the ratings and/or outlook could be revised downward if more intense competition leads to persistent declines in BTG’s profitability and cash flow.
BTG was incorporated in 1967 by the Taepaisitphongse family and its associates. The company is one of the leading agribusiness and food companies in Thailand. As of June 2016, the Taepaisitphongse family held directly 14.33% of the company’s shares and held indirectly a 69.45% share through Betagro Holding Co., Ltd., BTG’s parent company. BTG’s two major business segments, which are agro business and food business, cover feed, animal health, pet food, swine, poultry, egg, and processed meat. In 2015, revenue from feed and poultry products each comprised 35% of BTG’s total sales, followed by swine (20%). Domestic sales accounted for 88% of total sales, with the remaining 12% from exports.
Since its first joint venture with a Japanese company in 1980, BTG has continued to expand through joint ventures, mostly with Japanese partners. Apart from serving as channels for exports, the ventures provide BTG with the opportunities to improve operations and for technology transfers, especially the Specific Pathogen Free (SPF) technique for swine farming. With the types of collaborative efforts found in its joint ventures, BTG has become an industry-leading producer of high-quality pork meat in Thailand. The company’s chicken and swine operations are fully vertically integrated, from feed to food products. Fully-integrated operations help BTG’s products meet food safety and traceability standards. BTG’s main export markets are Japan and the countries of the European Union (EU). The products exported to Japan are mostly distributed via its partners.
To alleviate the effect of cyclical nature of the industry and the commodity-like nature of the products, BTG is striving to create value-added products and build its own brands. Recently, BTG is setting up a food innovation center for research and product development purposes, as well as plans to launch more value-added products. BTG also created its own domestic distribution channel, “Betagro Shops”. At the end of June 2016, the company had 148 stores in Thailand and four stores abroad.
BTG’s financial performance deteriorated in 2015, following the cyclical downturn of the livestock industry in Thailand. Plummets in the prices of broilers and swine cut BTG’s revenue and profit margin. Total revenues increased slightly by 1.1% year-on-year (y-o-y) to Bt83,450 million in 2015. The operating margin before depreciation and amortization weakened from a high of 8.3% in 2014 to 4.1% in 2015. Earnings before interest, tax, depreciation, and amortization (EBITDA) dropped from Bt7,307 million in 2014 to Bt3,954 million in 2015.
The oversupply situations in the livestock industry abated somewhat in 2016. According to the Thai Feed Mill Association, the average price of swine surged by 12.3% y-o-y to Bt67.9 per kilogram (kg.) during the first half of 2016, while the average price of poultry increased by 1.4% y-o-y to Bt36.2 per kg. during the same period. In addition to improving of swine price, lower cost of animal feed lifted up BTG’s profitability. BTG’s operating profit margin improved from 2.9% in the first half of 2015 to 5.4% in the first half of 2016. EBITDA also increased, rising to Bt2,678 million for the first six months of 2016, from Bt1,541 million during the same period a year earlier.
BTG’s balance sheet was fair. The total debt to capitalization ratio was 43.2% at the end of June 2016, down modestly from 44.5% in 2015. BTG’s liquidity profile remains satisfactory. The ratio of funds from operations (FFO) to total debt increased from 30.2% in 2015 to 39.6% (annualized, from the trailing 12 months) for the first half of 2016. The EBITDA interest coverage ratio was 11.3 times during the first six months of 2016, compared with 10.1 times in 2015.
Over the next three years, TRIS Rating’s base case forecast assumes EBITDA will hover around Bt5,000-Bt6,000 million per year. BTG plans to spend approximately Bt4,000-Bt5,000 million per annum in capital expenditures. Given the expected levels of EBITDA and capital expenditures, the debt to capitalization ratio is expected to stay below 50% in 2016-2019. The EBITDA interest coverage ratio will stay at around 10 times, and the FFO to total debt will range between 25%-35% during the same period.