Bangkok--19 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Thailand-based Land and Houses Public Company Limited’s (LH) National Long-Term rating at ‘BBB+(tha)’ with a Stable Outlook, and its National Short-term rating at ‘F2(tha)’.
The ratings reflect LH’s leading market positions and strong brand, particularly in the mid-to-high income single-detached-house (SDH) segment, which helped it maintain good profitability over the last five years. The company’s EBITDAR margin remains one of the highest among its local peers, although it dropped to 23% in 2010 (2009: 26%) from an increase in special business tax and ownership transfer fee.
LH’s earnings in 2010 were below Fitch’s expectation, given the political disruption in April-May 2010, which delayed new project launches in Q210. Its financial leverage rose significantly on the back of lower earnings, a larger land acquisition, higher capex as well as from a capital injection into LH Financial Group Public Company Limited (an associate company). However, LH’s presales rose 19.5% yoy to THB20.0bn in 2010, thanks to the higher numbers of new project launches in 2010 (versus 2009); presales are likely to continue to grow on the back of a larger number of new project launches and a broader range of product segment in 2011.
Fitch expects LH’s financial leverage to rise slightly in 2011 as the expected increase in earnings and the one-time cash proceeds from the divestment of Bangkok Chain Hospital Public Company Limited in March 2011 are not expected to offset higher capex, large land acquisitions and a high dividend payout. However, LH’s leverage should start to decline in 2012 from lower capex and less investment in other businesses.
LH’s credit profile is constrained by the cyclical nature of the Thai residential property development business, which usually results in volatile cash flows from operations. Key operating risks include a rising interest rate, increasing land prices in prime locations and higher construction material costs. In addition, significant investment in other business (such as financial services), as well as a high dividend payout could put additional pressure on the company’s already high financial leverage during the expansion phase of its core business.
The Stable Outlook reflects Fitch’s expectation that LH’s strong market position and business strategy, as well as Thailand’s improving economic and business sentiment should help the company maintain its financial profile concurrent with the current rating over the next 12 to 24 months.
Negative rating actions could arise from a sustained deterioration in the EBITDAR margin of lower than 15%, weaker than expected earnings which result in FFO interest coverage of lower than 3.5x, a prolonged period of high financial leverage and a worse-than-expected liquidity profile. A positive rating action is possible if the EBITDAR margin can be sustained higher than 25%, net debt to inventory falls below 45% or if net debt to EBITDAR falls below 3.0x on a sustained basis.