VIS reaffirms entity ratings of Adam Sugar Mills

June 13, 2023 (MLN): The VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Adam Sugar Mills Limited (PSX: ASML) at ‘A-’ for medium to long-term and ‘A-2’ for short term with a stable future outlook, the latest press release issued by VIS showed.

The medium to long-term rating of ‘A-’ signifies good credit quality; protection factors are adequate.

A short-term rating of ‘A-2’ denotes good certainty of timely payments.

ASML is a public listed company, principally engaged in the manufacturing and sale of sugar and by-products with an operating history of nearly six decades.

During MY22, ASML reported a higher crushing capacity of 16,000 tonnes per day (tpd) on account of a revision in installed capacity on the basis of an inspection report.

Sugar output in 2022-23 is expected to reduce owing to adverse impact on sugarcane crops due to floods.

However, due to surplus sugar stocks available in the country, the Government has allowed 250,000 Metric tonnes (MT) of sugar exports in the ongoing year.

Resultantly, sugar prices have exhibited a rising trend lately.

Meanwhile, the ratings do incorporate inherent cyclicality in crop levels and price vulnerability in sugar sector leading to competitive challenges for the company.

The ratings also take note of developments with regard to penalties imposed by the Competition Commission of Pakistan (CCP) on certain sugar mills.

During MY22, net revenues posted growth of 88% on account of higher volumetric sugar sales.

Average selling prices of sugar, on the other hand, were lower by 18.9% owing to excess sugar stocks available in the country and intervention of the Government to control sugar prices.

Gross margins weakened primarily as a result of higher average procurement prices while the selling prices remained relatively depressed.

The liquidity position of the company has remained adequate in terms of cash flows in relation to outstanding obligations

During 1H23, net sales remained largely muted vis-à-vis SPLY while gross margins declined further amid suppressed sugar prices.

This, along with higher financial charges has squeezed net margins.

Meanwhile, the company is carrying a sizable sugar inventory and, in full year, the profitability profile is expected to improve largely on the back of higher average sugar prices.

The leverage indicators are also expected to recede by the end of the marketing year in line with the lifting of the majority of the stocks.

The current sector outlook is viewed positively by industry players amid lower sugar production in the ongoing year and a sizable price differential between imported sugar vis-à-vis local retail prices.

Nonetheless, the ratings remain sensitive to realizing projected growth in revenues and profitability along with maintaining liquidity and capitalization indicators at a comfortable level.

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