Bangkok--15 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Land and Houses Public Company Limited's (LH) National Long- and Short-Term ratings at 'BBB+(tha)' and 'F2(tha)'. The Outlook is Stable. The ratings reflect LH's sustained leading position in Thailand's residential property development, particularly in detached houses. Its position and presales are further strengthened by successful entry into lower-to-medium-income condominiums in 2010-2011. Despite severe flooding in Bangkok Metropolitan Area in October-November 2011, LH posted one of the strongest Q411 revenue among peers.
LH's financial metrics weakened in 2011 as net debt to inventory increased to 49% and funds from operations (FFO) interest coverage dropped to 2.9x, from 46% and 4.0x, respectively. However, Fitch expects LH's financial metrics to improve in 2012 on lower capex, scheduled condominium ownership transfer, and proceeds from disposal of three serviced apartments. Moreover, additional divestment of rental assets and investments in listed associates would support liquidity if the need arises.
Nonetheless, the company's capex could remain high in the next two years if it is successful in its bid for a commercial land plot in Sam Yan, a prime commercial area in Bangkok CBD. Fitch has not taken into account the Sam Yan project in the ratings at this stage given the uncertainty surrounding the bid and will analyse the impact on the company's credit profile once details of the potential investment are more clearly defined.
Fitch expects LH's presales to recover in 2012, after having been hit by floods last year. The recovery will be supported by a large and diversified project portfolio and the planned launch of six condominium projects worth about THB11.3bn. Presales of low-rise properties in the non-flooded areas have shown signs of recovery in Q112 and should continue to improve in the next three quarters. However, presales of low-rise properties in the flooded areas are likely to remain slow. LH's presales of detached houses increased 12% in 2011 notwithstanding the floods in Q411.
LH's credit profile is constrained by the cyclical nature of residential property development which usually results in volatile cash flow. Key operating risks include rising minimum wages and construction costs, heightened competition and increasing land prices in prime locations. In addition, high dividend payouts could put pressure on the company's financial leverage during the expansion phase of its core business.
Negative rating action may result from a sustained deterioration in the EBITDAR margin below 15% (currently 22%), weaker-than-expected earnings leading to FFO interest coverage below 3.0x, a prolonged period of high financial leverage and a worse-than-expected liquidity profile.
Positive rating action may be considered if the EBITDAR margin rises above 25%, net debt to inventory falls below 45% or if adjusted debt net of cash to EBITDAR falls below 3.0x, all on a sustained basis.