Bangkok--11 Aug--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed MBK Public Company Limited's (MBK) National Long-term rating at 'A-(tha)' and National Short-term rating at 'F2(tha)'. The Outlook is Stable. The ratings reflect MBK's strong and stable cash flow generation from its core shopping centre, MBK Center. MBK Center leverages off its prime location with strong traffic flow, an established brand and a unique market positioning (with a greater diversity of products and wider range of target customers than its competitors in the same area).
The ratings are also supported by MBK's more expanded sources of cash flow, over the last two to three years, with investments in shopping centres in new locations, new hotel projects and golf courses; the expansion is likely to continue over the next two years. New operating assets in the MBK portfolio provide inorganic growth in earnings, and partly offset the substantial increase in the rental cost under the renewed lease agreement with Chulalongkorn University (effective April 2013). The expanded sources of cash flow will also help mitigate its revenue concentration risk on one single asset.
The ratings are constrained by the fact that MBK Center and another property, Pathumwan Princess Hotel (PPB), will face a substantial increase in the cost of rental once the renewed lease agreement comes into effect. This will likely have an impact on MBK's profitability, financial coverage and leverage in the medium term. However, the impact is likely to be weakened by MBK's historical ability to increase rental rates, and more diversified sources of cash flow.
MBK's hotels, golf courses and, to some extent, shopping centres are susceptible to Thai tourism, which in turn could be affected by economic cycles and external factors such as natural catastrophes, epidemics, terrorist attacks and political unrest. The domestic political environment is likely to become more stable, and in turn aid the recovery of the tourism sector following the general election on 3 July 2011. However Fitch notes that unresolved issues exist and remain a concern.
During 9MFY11 MBK's consolidated revenues and EBITDA rose 36.1% yoy and 20.7% yoy to THB5.7bn and THB1.4bn, respectively, mainly driven by the completely renovated Paradise Park and the new Riverdale golf course. However, the EBITDA margin decreased to 24.1% from 27.2% in 9MFY10 mainly from the high pre-operating cost of Paradise Park the first year after renovations.
Net adjusted debt at end-March 2011 increased to THB6.1bn from THB5.1bn at end-FY10 (end-June 2010), from capex and a large tax payment of THB640m on gains from the sale of a short-term investment in FY10. This together with an abnormally weak EBITDAR in Q4FY10, as a result of the political unrest in May 2010, caused MBK's financial leverage, as measured by adjusted net debt to last 12-month (LTM) EBITDAR, to rise to 3.7x at end-March 2011 (end-FY10: 3.6x). With MBK's more diversified sources of cash flow and expected continued recovery in tourism, coupled with high capex for business expansion, MBK's financial leverage is expected to gradually improve to the range of 3.3x-3.5x over FY11-FY12.
Downgrade triggers include a deteriorating operating performance caused by a prolonged unfavourable economic or political environment, or higher-than-expected debt-funded investment, resulting in a higher financial leverage on a sustained basis (net adjusted debt to EBITDAR at above 4.0x and net debt to EBITDA at above 3.0x). A positive rating action over the next two years is unlikely given the upcoming sharp increase in the cost of rentals under the renewed lease agreement