Bangkok--8 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Land and Houses Public Company Limited’s (LH) National Long-Term rating at ‘BBB+(tha)’, and its National Short-Term rating at ‘F2(tha)’. The Outlook is Stable.
Key Rating Drivers
Leading Market Position: LH is one of Thailand’s top developers with the largest market share in the single-detached-house market, particularly in the medium- to high-income segments. LH has a diversified property portfolio that includes single detached houses, townhouses, condominiums, serviced apartments and a shopping mall. LH’s position in the condominium market is also strengthening with high take-up rates and increasing presales.
Softening Demand: Residential property supply in Thailand is likely to drop in 2014 to match the lower demand caused by political instability and a slowdown in the economy. Developers tend to be more conservative about new project launches, especially condominiums, which are sensitive to economic conditions. However, Fitch believes that LH’s strong brand, diversified portfolio and solid backlog should soften the impact and help maintain its sales in 2014 at levels seen in the previous year.
Strong Profit Margins: LH has maintained high EBITDA margins relative to its industry peers, supported by the company’s ability to increase selling prices and its lower overhead costs. LH’s gross profit and EBITDA margins increased substantially in 2013 to 38.3% and 25.5%, respectively. However, Fitch expects LH’s EBITDA margin to decrease in 2014, reflecting the weakening demand.
Investment Holdings Support Liquidity: LH has solid liquidity support on account of its investments in listed associates and rental property portfolio, which may be sold to property funds or real estate investment trusts. The combined market value of LH’s investments in listed associates was THB34bn (USD1.05bn) at end-2013 but the valuation of these assets would depend on market conditions.
High Leverage: LH’s financial leverage - measured by net debt/adjusted inventory - increased to 52% in 2013 from 48% in 2012. Fitch expects LH’s net debt/adjusted inventory to remain high at 53%-54% in 2014-2015 due to the construction of condominiums and single detached houses, additional land acquisition, capex for new investment properties, and high-dividend payout. However, the divestment of its assets should provide headroom for LH’s future expansion.
Volatile Cash Flow: LH’s ratings are constrained by the cyclical nature of the residential property development business, which usually results in volatile cash flows from operations and limited earnings visibility compared with other industries.
Rating Sensitivities
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- EBITDAR margin rising above 25% (end-2013: 26%) on a sustained basis
- Net debt to adjusted inventory falling below 45% (end-2013: 52%) or net adjusted debt to EBITDAR falling under 3.0x (end-2013: 5.2x) on a sustained basis
However, Fitch does not anticipate any positive rating actions over the next 12-18 months, given Fitch’s expectations that LH’s leverage would remain high.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- EBITDAR margin declining below 15% on a sustained basis
- Weaker-than-expected EBITDAR, funds from operations and liquidity profile that result in FFO interest coverage falling below 3.0x (end-2013: 5.2x) on a sustained basis
- Higher-than-expected net debt from high debt-funded investments or substantial dividend payment