Bangkok--16 Oct--Fitch Ratings
Fitch Ratings (Thailand) Limited has revised the Outlook on AP (Thailand) Public Company Limited’s (AP) rating to Negative from Stable. At the same time, the agency has affirmed the property developer’s National Long-Term Rating at ‘BBB+(tha)’ and National Short-Term Rating at ‘F2(tha)’.
The Outlook revision reflects Fitch’s expectation that AP’s EBITDA margin would remain weak in 2014-2015. Continued weakness in its margin or further deterioration in profitability would hurt AP’s credit profile more than previously expected, even though Fitch expects AP’s leverage to improve in 2015 due to lower working capital for project construction.
Key Rating Drivers
Weak Profit Margin: AP’s EBITDA margin decreased to 15% in 2013 from 24% in 2010, mainly due to higher construction costs and sales, general and administrative (SG&A) expenses and lower contribution from high-margin condominium projects. Profitability was weaker than Fitch expected in 1H14. In 2013, AP’s profit margins sank below the average of its property development peers from above the average before 2012.
Volatile Cash Flow: Almost all of AP’s earnings are generated from property development activities, resulting in operating cash flow that is more volatile and less predictable. The company is exposed to the cyclical nature of property market, intense competition, and increasing supply of condominiums in and around Bangkok.
Slower Revenue Growth: Fitch expects AP’s revenue growth to soften to a high single-digit rate in 2014-2015 from 16% in 2013. Presales (after cancellations) from low-rise residential properties rose by 38% in January-September 2014 while high-rise property sales dropped by 10%. The presales figures include only a proportionate 51% of presales from the joint ventures with MEC Thailand Investment Pte. Ltd. and MJR Investment Pte. Ltd. in which AP holds 51%. Fitch expects residential property market sentiment as well as AP’s presales to improve in 2H14.
Decreasing Leverage: Fitch expects AP’s financial leverage, measured by net debt to inventory, to decrease to about 45%-47% at end-2014 and end-2015 from 49% at end-June 2014, though the decline is smaller than previously expected. AP’s condominium project development costs are likely to decrease in 2014-2015 because all of the condominiums AP has launched are joint ventures.
Diversified Project Portfolio: AP is a pure residential property developer with well-diversified portfolio in terms of property type and location. AP focuses on condominiums and townhouses for the middle-income and upper middle-income demographic, and has recently expanded into condominiums for low-income segment and single detached houses for the high income demographic The well-balanced portion of its projects in low-rise homes is likely to help reduce the volatility of cash flow because they have a shorter construction period.
Leading Market Position: AP is one of Thailand’s five largest residential property developers in term of revenue in 2013. Fitch expects AP to maintain its strong market position over the next five years due to its well-established brands in the condominium and townhouse markets in Bangkok and nearby cities.
Rating Sensitivities
Positive: Future developments that may, individually or collectively, lead to a revision of the Outlook to Stable at the current rating level include
- An improvement in EBITDA margin to above 16% (1H14: 15.6%), and
- An improvement in financial leverage (net debt to inventory) to 45%-47% (1H14: 48.7%)
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Further deterioration of EBITDA margin to below 15%, or
- Weaker-than-expected presales, or
- Aggressive project expansion and land acquisition leading to a sharp increase in financial leverage, with net debt to inventory sustained at above 50%.