Bangkok--19 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 has maintained its leading share in the single-detached-house (SDH) market, particularly in the medium- to high-income segments. Its strong market position is supported by its premium brands, diversified portfolio of SDHs, townhouses, condominiums and hotel/serviced apartments, a long track record in housing developments and a successful shopping mall.
Superior Profitability: LH’s EBITDA has grown over the past three years at an compounded annual growth rate of 23% and its EBITDA margin increased to 24.5% in 2014 from 19.3% in 2011, due to its ability to set selling prices and low overhead costs. LH’s EBITDA margin of about 25% in 2013-2014 was wider than the average 17%-18% of its top-ten listed peers. Fitch expects its EBITDA margins to remain healthy at about 23%-25%, depending on product mix, over the next three years.
Slower Growth: Fitch expects LH’s revenue from property sales to grow at a mid-single-digit pace in 2015. Its rental revenue is likely to decrease due to the absence of rents from Terminal 21 shopping mall, which was sold to a real estate investment trust in 2014. The impact of the reduced revenue would partly be mitigated by the increasing occupancy and room rates at its existing hotels and additional revenue from new property in the U.S. The lower interest rate and continued low energy prices should support property demand in 2015. However, LH has slowed down its new project launches – most of the 17 projects it plans to launch in 2015 are slated to begin sales in 4Q15. That compares with 21 projects that were launched in 2014.
Investment Holdings Support Liquidity: LH’s assets are the largest among the listed property developers. Its large investments in listed associates and investment property portfolio should support liquidity through a tough operating period or aggressive expansion. However, the valuation of these assets would depend on market conditions. The combined market value of LH’s investments in listed associates was THB46bn at end-2014.
Increasing Leverage: Fitch expects LH’s financial leverage, measured by net debt to adjusted inventory, to increase to about 45%-47% in 2015-2016 from 44% in 2014, mainly driven by purchases of new investment properties, land acquisitions, and high dividend payments. The increasing investment should support EBITDA growth over the next three years. Fitch expects the company’s leverage to reduce and remain below 45% over the medium term, assuming no aggressive debt-funded investments. Fitch’s expectation has not taken into account investors exercising their warrants for the company’s shares and a possibility that LH would divest some of its investment properties or shares in listed associates if the prices are satisfactory. The divestment would provide liquidity and reduce leverage.
Volatile Cash Flow: The ratings are constrained by the cyclical nature of the residential property development business, which usually results in volatile cash flow from operations (CFO) and limited earnings visibility compared with other industries.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Gross margin to decrease slightly in 2015;
- Land acquisition for residential property development of THB5.0bn a year in 2015-2016;
- Capex of THB4.0bn in 2015 and THB0.85bn in 2016 to develop rental properties.
Rating Sensitivities
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- EBITDAR margin rising above 25% (end-2014: 25%) on a sustained basis; or
- Net debt to adjusted inventory remaining below 45% (end-2014: 44%) or net adjusted debt to EBITDAR falling under 3.0x (end-2014: 4.2x) on a sustained basis
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-2014: 3.5x) on a sustained basis
- Higher-than-expected net debt from high debt-funded investments or substantial dividend payment