The “stable” outlook takes into account SST's improved business profile. The company's business risk has been lessened after divesting a volatile business. The outlook also reflects TRIS Rating's expectation that SST’s financial profile will continue to improve, supported by the growing cash flows from the food and storage segment.
SST's credit profile could be negatively impacted if its profitability continues to deteriorate or if the company makes aggressive debt-funded investments. SST's credit upside would be material if the company successfully integrates its food business resulting in higher-than-expected profitability and EBITDA exceed Bt600 million per annum.
SST was established in 1976 and was listed on the Stock Exchange of Thailand (SET) in 1987. As of March 2015, the Chinthammit family and affiliates held 67.5% of SST’s total shares. The company initially operated warehouses and wharfs in Samutprakarn province and expanded its line of business to include document storage services. SST expanded into the soybean and vegetable oil business in 2010. However, SST divested the business in September 2014. In 2012, SST expanded into the restaurant and QSR segment by acquiring the Mudman Group, the country’s master franchisee of “Dunkin’ Donuts”, “Au Bon Pain”, and “Baskin Robbins”. In 2014, SST further expanded by acquiring the Greyhound Group including Greyhound Co., Ltd. (GH) and Greyhound Cafe Co., Ltd. (GHC), adding SST's first self-owned food brands. At the end of 2014, SST operated 361 food outlets, compared with 338 outlets in 2013. Currently, SST has three lines of business: restaurant and QSR, fashion, and warehouse. The restaurant and QSR segment was the main revenue contributor, providing over 80% of total revenue and earnings before interest, tax, depreciation and amortization (EBITDA) in 2014.
At the end of 2014, SST reported total revenue of Bt2,455 million, a 19% increase from Bt2,071 million in 2013. The rise in revenue was due mainly to the consolidation of the Greyhound Group, which added Bt328 million to SST's revenues. Excluding the consolidation item, SST's revenue grew by 2.7% year-on-year (y-o-y). The slow growth reflects the weak domestic economy and sluggish consumer spending. SST's operating margin (operating income before depreciation and amortization, as a percentage of sales) dropped from 16.8% in 2013 to 12% in 2014. The drop was due in part to extra expenses from the acquisition and disposal of certain businesses.
Going forward, SST's overall operating performance is expected to grow, driven by food outlets expansion, including the newly acquired GHC. In addition, SST plans to expand GHC abroad through franchising. Franchising fees will improve SST's overall operating margin, as it carries little additional extra cost. In 2015, SST's revenue is expected to grow over 25% following the full-year consolidation of the Greyhound Group, coupled with SST's expansion plans for the restaurant and QSR segment. TRIS Rating expects that SST's operating margin will be in the mid-teens level.
In 2014, SST divested its loss-making soybean and vegetable oil business. The proceeds from the divestment were Bt815 million, all of which was used to repay the debts of this segment. In addition, SST sold assets to the Sub Sri Thai Smart Storage Fund (SSTSS) worth Bt818 million. SST invested 15% in the fund for Bt123 million. SST received Bt611 million net in cash from this transaction.
In mid-2014, SST acquired the Greyhound Group through Mudman for a total value of Bt1,854 million. The transaction was funded with the cash received from selling assets to SSTSS of approximately Bt600 million plus about Bt700 million in new debt. The remaining Bt588 million was financed by newly-issued shares of Mudman. Mudman increased capital of Bt1,418 million to support the acquisition and working capital needs. The capital increase dilutes SST shareholding in Mudman from 100% to 75%. Greyhound’s ex-shareholders hold 16% of Mudman and Khonkaen Sugar Industry PLC (KSL) owns 9%. InMarch 2015, SST bought back 5% of shares in Mudman from Greyhound’s ex-shareholders. As a result, SST currently hold 80% in Mudman, while Greyhound’s ex-shareholders hold 11% and KSL holds 9%.
After all these transactions, SST's total debt slightly decreased in 2014 to Bt1,907 million, from Bt2,161 million in 2013. SST's equity base is stronger, partly from its capital increase and increasing portion of the minority interests. As a result, SST's capital structure improved. At the end of 2014, SST's debt to capitalization ratio was 48.3%, compared with 62.9% in 2013. Despite the improvement in its capital structure, SST's cash flow protection weakened in 2014. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio stood at 2.1 times in 2014, compared with 3.7 times in 2013. The ratio of funds from operations (FFO) to total debt was 4.8% in 2014, compared with 6.3% in 2013. SST's weaker liquidity profile was due to higher financing costs and higher lease obligations, since SST entered a 10-year sale and lease back contract with SSTSS.
During 2015-2017, under TRIS Rating base case scenario, SST is expected to generate FFO of Bt280-Bt420 million per annum. This amount of FFO is sufficient for SST to service its financial obligations of Bt80-Bt180 million per annum and fund a portion of its investment plans. SST plans to spend Bt350-Bt500 million per annum to support the expansion of its restaurant and QSR segment, including some new brands in the pipeline. SST needs to fund part of its investment plans with new borrowings. As a result, the ratio of debt to capitalization ratio is expected to increase during 2015-2017. However, the ratio should stay below 50%. TRIS Rating expects SST's liquidity profile to improve from the current level. The ratio of FFO to total debt is expected to stay between 12%-19% during 2015-2017 while the EBITDA interest coverage ratio will stay above 3 times over the same period.
Sub Sri Thai PLC (SST)
Company Rating: BBB-
Rating Outlook: Stable