Bangkok--6 Jun--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. The agency has simultaneously withdrawn LH's ratings for commercial reasons.
Key Rating Drivers
Leading Market Position: LH is the third-largest residential property developer in Thailand, based on 2015 revenue. The company holds the largest market share in the single-detached-house (SDH) sector, particularly in the medium- to high-income segments. Its strong market position is supported by its premium brands and diversified portfolio of SDHs, townhouses, condominiums and hotels.
Lower - But Strong - Profitability: LH's EBITDA margin edged down to 23% in 2015 from 24%-25% in 2013-2014, due mainly to the company's attempts to clear its overhanging projects inventory which had a thinner gross margin. However, LH still maintains the widest EBITDA margin against the top-four developer peers, whose margins also narrowed to about 13%-20% in 2015 (2014: 14%-21%). We expect LH's EBITDA margin to remain at about 23%-24% over the next three years.
Revenue Growth to Recover: Fitch expects LH's revenue growth to recover to the mid-single-digits in 2016, supported by newly launched pre-built projects in 4Q15 and 2016 valued at about THB40bn, and a backlog to be transferred in 2016. LH's 1Q16 sales revenue of THB7.0bn and a THB7.8bn backlog to be transferred in the rest of the year has secured about 53% of the projected property sales in 2016. LH's property sales shrank by 7% (low-rise: -13%, high-rise: +16%) in 2015. The rental revenue also dropped - by 11% - due to the absence of revenue from the Terminal 21 shopping mall. Discarding Terminal 21, the rental revenue grew by 53%, supported by the increased room rate and occupancy of the existing properties and additional rent from new property in the US.
Leverage to Rise: Fitch expects LH's financial leverage (measured by net debt to adjusted inventory) to increase to about 47%-50% in the next three years from 45% in 1Q16, driven mainly by purchases of new investment properties, land acquisitions, and high dividend payments. The company acquired a new apartment building in Campbell, California, for USD100m or about THB3.6bn in 1Q16. However, the investments were funded by cash inflow from the divestment of the Grande Centre Point Hotel Terminal 21 of THB3.7bn and the warrant exercise of about THB2.6bn in 2015.
Investment Holdings Support Liquidity: We believe LH's large investments in listed associates, and its investment-property portfolio, ought to support liquidity through a tough operating period or aggressive expansion. The combined market value of LH's investments in listed associates was THB42bn at end-2015.
Volatile Cash Flow: The ratings are constrained by the inherently cyclical nature of the residential property-development business, which usually results in more volatile cash flow from operations (CFO) and limited earnings visibility compared with other industries.
Rating Sensitivities
Not applicable