The "BBB-" ratings reflect DA's position as one of the leading printing & writing (P&W) paper producers in Thailand, its fully integrated pulp and paper mills, and the strong brand name of "Double A" products. These strengths are partially offset by the inherent volatility of the pulp and paper industry, DA's exposure to foreign exchange risk, and falling demand for P&W paper due to a wide spread slowdown in the global economy and a shift of consumer behavior towards digital media. The success of market penetration, the restoration of profitability, and some related-party transactions remain rating concerns.
The "stable" outlook is based on the expectation that DA's operations will recover in 2016. Rises in capacity utilization rates at the new mills and the improvement plan should enhance profitability and help DA regain its cost competitive edge in the medium term.
A credit rating or outlook upside situation will arise if DA's operations and financial results improve close to its normal levels. In contrast, the ratings could be revised downward if its financial profile deteriorates further.
DA is the leading P&W paper producer in Thailand. It currently owns and operates five paper mills, with total design capacities of 1,045,000 tonnes per annum (tpa). Its paper production capacity doubled after the start-up of APM3 in November 2012 and the acquisition of Alizay in France in January 2013.
APM3 has a capacity of 220,000 tpa of paper products. It is the most efficient paper mill among all DA's mills, and is designed to use 100% short-fiber pulp as the raw material. Alizay has a capacity of 300,000 tpa. It is positioned as a production base for the DA Group to serve markets in Europe, the Middle East, Africa, and North America. As a result of the huge expansion in its paper production capacity, DA needs to procure some pulps from the market. DA has own pulp production capacity of 427,000 tpa.
Paper sales account for 98% of the company's annual sales. DA's markets are geographically diverse, and it has a strong distribution network covering over 145 countries worldwide. Sales to the domestic market comprise nearly 30% of total sales. About 50% of sales come from other markets in Asia, 10% from markets in Europe, and 10% from markets elsewhere in the world. DA's sales volume has increased recently, but still far below its increased paper production capacity. The company's paper production capacity rose by 560,000 tpa, from 485,000 tpa to 1,045,000 tpa. However, its sales volume increased by 135,546 tonnes, from 533,303 tonnes in 2012 to 668,849 tonnes in 2014.
DA reported the weakening results during the past two years. The operating profit margin (operating income before depreciation and amortization as percentage of sales) decreased to 6% in 2014, and declined further to 5% in the first half of 2015, compared with an average of 11% during 2011-2013. The deterioration in profitability resulted from the launches of a range of new, low-priced products to build market share in new markets. In addition, DA suffered from higher cost of production during the first half of 2015 due to utility and machine problems.
Cash flow protection deteriorated as profitability declined. The fund from operation (FFO) to total debt ratio dropped to 3% in 2014, and to 1% in the first half of 2015, versus an average of 11% during 2011-2013. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio decreased to 1.7 times in 2014, and to about 1 times in the first half of 2015, versus an average of 2.6 times during 2011-2013. Despite the drops, the company's liquidity was still sufficient. DA disposed its stake in National Power Supply PLC (NPS), an associated company, from 36.2% to 25.5%, in the last quarter of 2014. DA received a Bt2,100 million payment for the divestiture in the first quarter of 2015. The proceeds boosted the company's liquidity though it had operating losses in the first half of 2015. The debt to capitalization ratio rose slightly to 58% at the end of June 2015, versus an average of 56% during 2011-2013. The company's refinancing risk has increased as its financial performance has deteriorated. However, DA plans to sell all of its remaining 25.5% stake in NPS, and expects to receive approximatelyBt4,300 million. Proceeds from the transaction will be sufficient to redeem the bonds maturing in December 2015 (DA15DA) and February 2016 (DA162A), amounting to Bt3,500 million.
During 2016-2018, TRIS Rating expects DA's revenue will range from Bt24,000-Bt26,000 million per annum. The operating margin should improve to 10%-12%, supported by increasing capacity utilization of the new mills and DA's improvement plan. The plan includes rebalancing of product mix, production efficiency enhancement, and reduction of production costs. FFO should bottom out in 2015, then rise to Bt1,500-Bt2,500 million per annum. As a result, the FFO to total debt ratio is expected to rise to 10%-15%. The EBITDA interest coverage ratio should also improve to 2.5-4 times. The debt to total capitalization ratio is expected to improve to below 50% by the next three years.
Double A (1991) PLC (DA)
Issuer Rating: BBB-
Issue Ratings:
DA15DA: Bt2,500 million senior unsecured debentures due 2015 BBB-
DA162A: Bt1,000 million senior unsecured debentures due 2016 BBB-
DA16DA: Bt1,500 million senior unsecured debentures due 2016 BBB-
DA172A: Bt754.2 million senior unsecured debentures due 2017 BBB-
DA172B: Bt2,245.8 million senior unsecured debentures due 2017 BBB-
DA17DA: Bt1,000 million senior unsecured debentures due 2017 BBB-
DA182A: Bt3,339.6 million senior unsecured debentures due 2018 BBB-
DA182B: Bt1,160.4 million senior unsecured debentures due 2018 BBB-
Rating Outlook: Stable