Bangkok--21 Oct--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed AP (Thailand) Public Company Limited’s (AP) National Long-Term Rating at ‘BBB+(tha)’ and National Short-Term Rating at ‘F2(tha)’. The Outlook is Stable.
Key Rating Drivers
Leading Market Position: AP (formerly Asian Property Development Public Company Limited) is one of the leading residential property developers in Thailand with a strong foothold in the condominium and townhouse markets in Bangkok and nearby cities. Its established brands and track record, particularly in mid- to upper mid-tier properties, should help maintain its reasonable presale growth and profit margin over the medium term.
Diversified Project Portfolio: AP has a well-diversified portfolio in terms of property type and locations. It has expanded its condominium projects into the lower-income segment in the past two years, and offered more single detached houses (SDHs) in a higher price range. These enable the company to capture the demand dynamics in each segment. AP’s portion of low-rise property also helps reduce the volatility of cash inflow caused by the long construction periods for high-rise properties.
Weakening Profit Margin: AP’s EBITDA margin is likely to decline further in 2013 from 17.9% in 2012, although gross margin is likely to be maintained at about 34%. This is due to higher selling and administrative expenses, given intense competition among large developers, and increasing personnel expenses from the scarcity of human resources in this field. Fitch expects AP’s EBITDA margin to be in the range of 16%-18% in 2013-2014, compared with above 20% in 2009-2011.
Leverage to Remain High: Fitch expects AP’s net debt to inventory to hover at 46%-47% in 2013-2014, which is similar to that in 2010. AP’s net debt to inventory was volatile in the past two years. It rose to above 50% in 2011 due to poor sales during severe flooding in Thailand and plunged to about 43% at end-2012 due to lower land acquisition and recovery demand after the flood.
Volatile Cash Flow: Almost all of AP’s earnings are generated from property development activities. Therefore, its operating cash flow is relatively volatile and it has limited visibility. The company is exposed to the cyclical nature of the property market, intense competition, and increasing supply of condominiums in Bangkok and its vicinity.
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to negative rating
action include:
- Weaker-than-expected presales, or
- Aggressive project expansion and land acquisition leading to a sustained deterioration in funds flow from operations (FFO) interest coverage to below 3.5x (2012: 3.95x) or a sharp increase in financial leverage — with net debt to inventory sustained at above 50%.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- An improvement in financial leverage i.e. net debt to inventory at below 45% on a sustained basis. However given the company’s expected leverage, positive rating action is unlikely over the next 12-18 months.