Philippine Rating Services Corporation (PhilRatings) assigned an Issue Credit Rating of PRS Aaa, with a Stable Outlook, for D&L Industries, Inc.’s (D&L) proposed P3.0 billion maiden bond issuance, with an Oversubscription Option of up to P2.0 billion.
Obligations rated PRS Aaa are of the highest quality with minimal credit risk. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong. PRS Aaa is the highest rating assigned by PhilRatings.
The assigned Outlook is an indication as to the possible direction of any rating change within a one-year period and serves as a further refinement to the assigned credit rating for the guidance of investors, regulators, and the general public. A Stable Outlook is assigned when a rating is likely to be maintained or to remain unchanged in the next twelve months.
The rating and Outlook were assigned given the following key considerations: (1) strong market position in the industries that it is engaged in; (2) diversification of products offered and markets served; (3) bulk of D&L’s revenues are from innovation-driven, high margin specialty products, protecting the Company from keen competition and ensuring continued demand for its products; (4) revenues have been fluctuating historically although net income was generally on an uptrend prior to the pandemic while margins were maintained within a narrow band; and (5) relatively conservative debt management and adequate cash flow generation.
PhilRatings’ ratings are based on available information at the time that the rating review was performed. PhilRatings shall continuously monitor developments relating to D&L and may change the rating and Outlook at any time, should circumstances warrant a change.
D&L has established itself as a leading market player, with its four principal businesses – namely, Food Ingredients, Oleochemicals and Other Specialty Chemicals, Specialty Plastics and Consumer Products Original Design Manufacturer (ODM) – having significant market shares. According to its management, most of the Company’s business segments are either the country’s top market player or rank as a close second in the industries it operates in. Having been in business for over five decades, D&L is a pioneer in several of the businesses it operates in and has essentially grown with the domestic industries it serves.
With its track record and experience, the Company enjoys longstanding customer relationships with the country’s leading consumer companies. D&L continues to leverage on these established ties to further enhance and solidify its market position. The Company has likewise been able to sustain and grow its operations amidst the ups and downs experienced by the Philippine economy.
D&L offers various products with a wide range of applications under its four business segments. These products are in turn offered to customers belonging to different industries and catering to different needs. The diversification in terms of D&L’s product offerings and customer base results in developments in one sector balancing out developments in another. The importance of such was highlighted amidst the COVID-19 pandemic, as for instance, lower volumes from hotels, restaurants and caterers given the pandemic and quarantine restrictions were partly offset by demand from clients belonging to other sectors such as dairy, biscuits and noodles since more people stayed, worked and dined at home.
PhilRatings also positively noted the geographical diversification in D&L’s revenue sources, given that a sizable portion (29% in 2020 and 34% in 1Q2021) of the Company’s revenues are from exports. The significant share of exports to total revenues also reflects D&L’s capability to compete in other markets, meeting customer specifications – even in countries aside from the Philippines.
The high margin specialty products (HMSP) segment, on average, accounted for approximately 63% of D&L’s revenues from 2016 to 2020, while commodities made up the balance. The HMSP segment is comprised of products customized according to customers’ needs. The development and manufacturing of these products entail research and development (R&D), as keeping up with evolving technological innovations is required in order to respond effectively to its clients’ requirements and specifications. Considering the nature of the HMSPs and their substantial share to total revenues, D&L is able to manage the level of competition that it is exposed to. Moreover, given the level of competition in this space and D&L being the sole supplier for some of these customized products, demand for the Company’s HMSPs is seen to continue.
The observed fluctuations in revenues largely follow the nature of D&L’s business. The movements in commodity prices of raw materials caused by factors beyond the control of the Company have affected revenue levels historically. The changes in commodity prices are passed on to customers following the Company’s Passthrough pricing mechanism, thereby subjecting its revenue base to corresponding fluctuations. Despite the shifts in revenue levels, there was a general uptrend in net income since 2014 to 2018. From P2.0 billion in 2014, net income grew to P3.2 billion in 2018 posting a compound annual growth rate of 12%. Growth was cut short in 2019 as demand was affected by the delay in the passing of the national budget which particularly affected the non-food segments. The decline continued in 2020 due to the worldwide outbreak of the COVID-19 pandemic. Since 2014, margins were steadier and were maintained within a narrow band compared to the movements in revenues. Gross profit and net profit margins were within 16% to 21% and 10% to 13%, respectively. Net profit margin was at its lowest at 9% in 2020.
D&L maintained conservative debt levels as of 1Q 2021, even as total debt rose by 29% to P7.1 billion. Debt-to-equity ratio was not more than 0.4x since 2016. At present, D&L relies fully on short-term financing for its funding requirements. PhilRatings notes that the Company’s proposed bond issuance is a step towards improving its debt mix and may put the Company in a better position to benefit from market opportunities that may arise.
Positive cash from operations were sufficient to fund the bulk of cash outlays in relation to dividend payments and acquisitions of property and equipment. Sustained projected increase in total revenues will continue to support growth in cash flows and will place D&L in a very good position to pay off its proposed bonds in three and in five years.
D&L Industries is a Filipino company engaged in product customization and specialization for the food, chemicals, plastics and consumer products ODM industries. The company’s principal business activities include manufacturing of customized food ingredients, specialty raw materials for plastics, and oleochemicals for personal and home care use. Established in 1963, D&L has the largest market share in each of the industries it serves, as well as long-standing customer relationships with the Philippines’ leading consumer and manufacturing companies. It was listed on the Philippine Stock Exchange in December 2012. For more information, please visit //www.dnl.com.ph/investors/.
This press release may contain some “forward-looking statements” which are subject to a number of risks and uncertainties that could affect D&L’s business and results of operations. Although D&L believes that expectations reflected in any forward-looking statements are reasonable, D&L does not guarantee future performance, action or events.