Bangkok--6 Dec--TRIS Rating
TRIS Rating has downgraded the company rating of Property Perfect PLC (PF) to ?BB+? from?BBB-?. At the same time, TRIS Rating has affirmed the ratings of PF?s senior partially guaranteed debentures (PF143A, PF153A, and PF15NA) at ?BBB? and the rating of PF?s senior debentures (PF156A) at ?BB+?. The outlook remains ?stable?.
The downgrade of PF?s company rating reflects the company?s weaker profitability and higher financial leverage than projected. PF?s worsening operating performance is mainly due to rising operating costs in both the property development and hotel businesses, and the poor operating performance of its condominium segment. The rating also takes into consideration the company?s proven track record in the residential housing market, the cyclical and competitive nature of the property development industry, plus concerns over rising operating costs and the widespread labor shortage among contractors.
The ?stable? outlook reflects the expectation that PF will be able to maintain its debt to capitalization ratio below 70%. The company is also expected to complete and deliver its condominium projects as planned. In addition, the company?s plan to divest some non-core assets will help prevent its liquidity risk in the short- to medium-term. PF?s ratings or outlook would be downgraded further should its business and financial profiles decline from the current level. On the contrary, its ratings or outlook would be upgraded should its operating profit margin increase to around 10%-12% and its debt to capitalization ratio stays at around 60%-65% on a sustainable basis.
As PF no longer has an investment grade rating, the assigned issue ratings will be based not only on the corporate credit rating but also the prospects for recovery in the event of default. Since the recovery rate of its senior debentures is expected to be higher than 50%, the issue rating is rated at the same level as the company rating at ?BB+?. The issue rating of PF?s partially guaranteed debentures remains at ?BBB?, two notches higher than PF?s senior debentures. The notch up reflects a guarantee of the principal amount given by Thanachart Bank PLC (TBANK) (the Guarantor). TBANK guaranteed 60% of the principal of these debentures. TBANK is rated ?AA-? with a ?stable? outlook by TRIS Rating.
PF is one of the leading residential property developers in Thailand. The company was established in 1985 by Mr. Chainid Adhyanasakul and was listed on the Stock Exchange of Thailand (SET) in 1993. As of September 2013, PF had 38 existing residential projects, with a total remaining value of around Bt37,000 million available for sale. The company had a backlog worth approximately Bt8,000 million. PF?s residential project portfolio comprises housing projects (around 70% of the total project value) and condominium projects (30%).
PF?s presales during the first nine months of 2013 declined by 31% y-o-y to Bt7,675 million. Presales from condominium projects was low at Bt1,525 million in the first nine months of 2013 as a result of the launch of only one condominium project and slow speed of presales in its existing condominium projects. However, total revenue increased by 21% y-o-y to Bt7,750 million. Revenue from housing projects was Bt5,391 million during the first nine months of 2013 while revenue from condominium projects was only Bt1,050 million, significantly lower than TRIS Rating?s expectation. The lower revenue recognition was due to the delay in transfer of PF?s several low-rise condominium projects.
Higher operating costs in both the property development and hotel businesses caused its profitability to decline continuously. PF?s operating margin, as measured by operating income before depreciation and amortization as a percentage of sales, was 12.2% in 2011, but dropped to 8.7% in 2012 and 7.5% in the first nine months of 2013. Financial leverage remained relatively high due to its large investments in housing and condominium projects. As a result, the debt to capitalization ratio jumped from 49% in 2009 to 61% in 2010. The ratio stepped up consecutively to nearly 70% as of September 2013. Rising financial leverage and worsening operating performance caused its cash flow protection to deteriorate further. Its funds from operations (FFO) to total debt ratio declined to 1.3% (annualized with trailing 12 months) for the first nine months of 2013, down from 2.4% in 2012 and 5.3% in 2011.
Over the next three years, TRIS Rating views that PF?s leverage will remain high, with the debt to capitalization ratio exceeding 60%, since the company needs large investment to complete several condominium projects during 2014-2016. Also, PF plans to invest in three community malls during 2014-2016 with construction cost of Bt4,150 million in total. PF?s future investment plans will pressure thecompany?s financial position during the next three years. In addition, PF has short-term and long-term debentures maturing in 2014 at Bt4,300 million and in 2015 at Bt7,000 million. Therefore, the company plans to sell some land plots, divest non-core asset, and find strategic partners for its investment in community malls during the remainder of 2013 through 2014. This should help ease its financial stress in the short- to medium-term.
Property Perfect PLC (PF)
Company Rating: BB+
Issue Ratings:
PF143A: Bt500 million senior partially guaranteed debentures due 2014 BBB
PF153A: Bt2,000 million senior partially guaranteed debentures due 2015 BBB
PF156A: Bt2,000 million senior debentures due 2015 BB+
PF15NA: Bt3,000 million senior partially guaranteed debentures due 2015 BBB
Rating Outlook: Stable