Bangkok--19 Nov--TRIS Rating
TRIS Rating has upgraded the company and the senior unsecured debenture ratings of Hemaraj Land and Development PLC (HEMRAJ) to “A” from “A-” and has revised the outlook to “developing” from “positive”. The upgrade is due to a fundamental shift of HEMRAJ’s earning structure towards predictable cash flows from utility and power businesses. The recurring income from the utility services, rental income, and dividends now comprise more than 50% of HEMRAJ’s earnings. At the same time, TRIS Rating revises the rating outlook of HEMRAJ to “developing”. The “developing” outlook reflects the uncertainty surrounding a potential change in HEMRAJ’s major shareholders after WHA Corporation PLC (WHA) announces its plan to take over HEMRAJ’s operations. The “developing” outlook reflects the uncertainty of HEMRAJ’s credit profile following a tender offer proposed by WHA. A change in HEMRAJ’s major shareholders may affect HEMRAJ’s business policy and its financial profile. A rating confirmation would be likely if HEMRAJ can maintain its business strength and ability to generate reliable cash flows despite the change in its shareholders. A downgrade could occur, should the change lead to a deterioration in HEMRAJ’s business profile or debt serviceability. If WHA becomes HEMRAJ’s major shareholder, the rating of WHA, the parent company, will have an influence on HEMRAJ’s ratings.
The “A” ratings continue to reflect HEMRAJ’s proven record in industrial estate development and its healthy profitability. These strengths are offset in part by the volatile nature of the industrial property market. The current slowdown in the Thai economy and the fragile recovery in the global economy, are rating concerns.
HEMRAJ is one of the leading industrial estate developers in Thailand. It was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1992. As of September 2014, the Horrungruang family held 15.01% of HEMRAJ’s shares. In addition to selling industrial land and utility services, the company has invested in power generating projects. From 2011 through the first nine months of 2014, sales from industrial land and properties accounted for 60%-70% of the company’s annual revenue. Recurring income, mainly from utility services and rental income, comprised 30%-40% of total revenue.
HEMRAJ owns and operates seven industrial estates in Thailand. Its estates are located in Rayong, Chonburi, and Saraburi provinces with a total gross area of 44,643 rai. Of the 636 customers in HEMRAJ’s estates as of September 2014, 34% were in the automotive industry and 14% were in the consumer products industry. HEMRAJ had 11,157 rai of land available for sale, as of September 2014. Of the total saleable area, 79% was located in Rayong province.
The sluggish economy and the political turmoil in Thailand harmed investment activity as reflected in an industry-wide drop in the sales of industrial land in Thailand during the first half of 2014. According to a report from CB Richard Ellis (CBRE), total industrial land sales in Thailand declined to only 649 rai in the first half of 2014, compared with 2,157 rai sold in the same period of 2013. HEMRAJ’s land sales followed the industry trend. The company sold 297 rai of industrial land, down from 1,190 rai in the first six months of 2013. Land sales fell because of a slowdown in general manufacturing activity. Automobile production, which is one of the key drivers for industrial land demand, plunged by 27.0% over the same period of the prior year (year on year or y-o-y) during the first nine months of 2014. However, sales of industrial land picked up gradually in the third quarter of 2014 after the political stand-off ended in May 2014. HEMRAJ sold 225 rai in the third quarter of 2014, from 176 rai in the second quarter of 2014. HEMRAJ’s average market share, in terms of land sold, remained healthy. Its market share averaged at 27% of total industrial land sold in Thailand during 2009-2013 while the other leader accounted for 28% of land sold during the same period. For the first six months of 2014, HEMRAJ was marked as the top seller of industrial land, selling 46% of all industrial land sold, according to CBRE’s report.
HEMRAJ’s recurring income continued to grow despite the economic slowdown and political tension. In the first three quarters of 2014, income from the sales of utility services, which accounted for two-thirds of total recurring income, continued to increase by 9.7% y-o-y to Bt1,288 million. The rental income from industrial properties fell by 16.8% y-o-y in the first nine months of 2014 because HEMRAJ sold 150,117 square meter (sq.m.) of ready built factories (RBF) to Hemaraj Industrial Property and Leasehold Fund (HPF) in December 2013 and demand for RBFs and warehouses weakened during sluggish economy and political tension. Total recurring income, including utility sales, rental office space, rental income from industrial properties and pipe-rack rental increased by 4.5% y-o-y to Bt1,998 million in the first nine months of 2014.
HEMRAJ’s total revenue declined by 18.5% y-o-y to Bt5,150 million in the first nine months of 2014. However, earnings before interest, tax, depreciation, and amortization (EBITDA) rose by 11.9% y-o-y to Bt3,563 million in the first nine months of 2014. The increase in EBITDA was the result of the continuing growth in recurring income and the higher profit margins on the industrial land sales. The contribution from HEMRAJ’s joint-ventures in power projects was another factor boosting HEMRAJ’s EBITDA in the first nine months of 2014. Investments in power associates contributed equity income of Bt1,300 million in the first nine months of 2014, excluding an unrealized gain from foreign exchange. In the first nine months of 2014, more than half of HEMRAJ’s EBITDA came from the recurring income plus income HEMRAJ earned from its power projects. This healthy income structure provided strong cushion against volatile sale of industrial land. In the third quarter of 2014, HEMRAJ reported Bt771 million in EBITDA despite land sales revenues of only Bt158 million. The EBITDA interest coverage ratio was satisfactory at 6.4 times in the first nine months of 2014. The funds from operations (FFO) to total debt ratio was good at 17.3% (annualized with trailing 12 months) in the first three quarters of 2014.
HEMRAJ’s leverage was under control because it sold some assets to property fund in 2013. In December 2013, HEMRAJ sold/leased a total of 150,117 sq.m. of RBF space to a property fund for Bt4,700 million. HEMRAJ recorded a gain of Bt2,233 million from the property sale, net of a provision for the minimum rental guarantee to the fund. Even though HEMRAJ made considerable investments of Bt8,500 million during the year, the sizeable property sale plus good cash flow from operation help keep HEMRAJ’s leverage level moderate. The total debt to capitalization ratio was 49.7% at the end of September 2014, compared with 49.2% in 2012. HEMRAJ also had an cash balance of Bt2,191 million as of September 2014. Going forward, HEMRAJ plans capital expenditures of about Bt4,000 million per year. Most of the investments can be funded from its operating cash flow with expected EBITDA of Bt3,500-Bt4,500 million per year.
On 17 November 2014, WHA, a provider of built-to-suit warehouses and factories for rent, announced its intention to make voluntary tender offer for HEMRAJ. WHA executed Memorandum of Understanding (MOU) to enter the share purchase agreement to buy 22.53% of HEMRAJ’s outstanding shares from HEMRAJ’s major shareholders in proceeding with the tender offer. The tender offer will be subject to certain requirements, including approval from WHA’s shareholders, WHA’s fund raising plans, and success of tender offer itself. WHA may cancel the tender offer if the offer is not accepted by shareholders owning 50% or more of HEMRAJ’s outstanding shares.
Hemaraj Land and Development PLC (HEMRAJ)
Company Rating: A
Issue Ratings:
HEMRAJ16OA: Bt1,500 million senior unsecured debentures due 2016 A
HEMRAJ217A: Bt2,000 million senior unsecured debentures due 2021 A
HEMRAJ231A: Bt2,500 million senior unsecured debentures due 2023 A
HEMRAJ244A: Bt2,500 million senior unsecured debentures due 2024 A
Rating Outlook: Developing