RAM assigns A-/P2 corporate credit ratings to Bairaha Farms PLC
Monday, 6 January 2014 00:00
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RAM Ratings Lanka has assigned Bairaha Farms PLC (Bairaha or the Company) long and short-term corporate credit ratings of A- and P2, respectively.
The long-term rating carries a stable outlook. Bairaha is a holding company with interests in a broad spectrum of poultry farming activities such as chicken processing; the manufacture, distribution and sale of pre-cooked meats; manufacture and sale of supplementary poultry farming products and the operation of hatcheries.
Bairaha and its subsidiaries are collectively referred to as the Group.
Bairaha’s financial profile is deemed strong, with its gearing ratio standing at 0.12 times as at end-FY Mar 2013. Bairaha’s cash flow-protection metrics are also considered solid, its funds from operations debt coverage (FFODC) ratio coming in at 1.13 times in FY Mar 2013 and 1.48 times in 1H FY Mar 2014. Bairaha boasted a strong liquidity position, with its cash and cash equivalents (CCE) of Rs. 165.93 million serving as a strong buffer against short-term debts amounting to Rs. 51.53 million as at end-FY Mar 2013.
Meanwhile, Bairaha, with an estimated market share of approximately 50% of broiler parent breeder chicks, 18% of day-old chicks and 10% of broiler chicken meat, is a dominant player in the Sri Lankan poultry market. Bairaha is one of the industry’s most highly-integrated poultry producers and has a strong presence in the processed foods market segment.
The company is also one of only three operators of broiler grandparent farms and hatcheries in the country, thus enabling it to maximise economies of scale and influence pricing.
Elsewhere, the growth potential of the local poultry sector also remains encouraging due to an improving market balance, coupled with declining grain and feed costs. Furthermore, Sri Lanka’s per-capita chicken consumption is expected to rise with higher per capita disposable incomes. Poultry prices will see further support from the government in future, given that the existing price ceiling for poultry products was replaced in the budget for 2014 by a proposed pricing formula that takes into account the overall cost of production.
Bairaha is affiliated with Cobb-Vantress Inc. (Cobb) USA, one of the oldest poultry breeding companies globally and a subsidiary of Tyson Foods, Inc. USA, one of the world’s largest processers and marketers of chicken. The Group is Cobb’s Sri Lankan representative and is also involved in the export of broiler breeder chicks via an associate. Cobb provides the Group with technical support and guidance on a quarterly basis whilst also providing expert advice on breeding, production and disease prevention.
However, nearly 30-40% of the raw materials for the production of feed for producing broiler meat are currently imported by feed millers in the country. Feed accounts for around 65% of Bairaha’s total production cost. The increase in world raw material prices in fiscal 2011 and fiscal 2012 resulted in Bairaha’s operating profit before depreciation, interest and tax (OPBDIT) margins contracting to 19.59% in FY Mar 2012 and 8.78% in FY Mar 2013 (FY Mar 2011: 24.16%). The poultry industry in the country is highly regulated by the Consumer Affairs Authority of Sri Lanka, with the maximum retail price of broiler branded chicken meat capped at Rs. 380 per kilogram as of beginning FY Mar 2013.
Due to the price ceiling, poultry producers have not been able to transfer the impact of escalating feed and other input prices to customers, which have resulted in the industry’s overall profitability diminishing in FY 2012 and FY 2013. Accordingly, the Group continues to register volatile profit margins.
The industry has become extremely intensive, resulting in a high concentration of poultry around a few districts. A higher-density poultry population means that diseases, if they gain access to a farm, can spread rapidly not only within a farm, but also from farm to farm, unless rigorous biosecurity measures are instigated. Poultry producers cannot insure against this risk as insurance coverage against poultry diseases is currently unavailable. Thus, producers are forced to expend a key proportion of their costs on disease prevention and control, as the consequences of disease can be detrimental to overall profitability.
However, we note that Bairaha has a strong health and safety framework is supported by a well-equipped microbiological and Eliza laboratory which is centred on minimising the risk associated with contagious poultry diseases.
Bairaha is exposed to supplier concentration risk. The company’s major feed supplier accounts for approximately 90% of its total supply, whilst a large proportion of its drug/vaccination supply comes from two sources. The loss of any one supplier could affect overall volumes available and in turn affect overall sales, while the loss of a drug/vaccination supplier could result in major health and hygiene repercussions.
Nevertheless, we note that these suppliers have had long-standing relationships with Bairaha, and the probability of the company losing any of them is considered remote.
