Bangkok--22 Jan--Fitch Ratings
Fitch Ratings-Bangkok-19 January 2018: Fitch Ratings (Thailand) Limited has affirmed WHA Corporation Public Company Limited's (WHA) National Long-Term Rating and the National Long-Term Rating on its outstanding senior unsecured debentures at 'BBB+(tha)'. WHA's National Short-Term Rating has also been affirmed at 'F2(tha)'. The Outlook remains Negative. Fitch has simultaneously withdrawn all of WHA's ratings and the ratings on its outstanding senior unsecured debentures due to commercial reasons.
KEY RATING DRIVERS
Deleveraging Remains Challenging: The Negative Outlook reflects the remaining challenge for WHA to deleverage as planned due to uncertainty in sales of industrial estates and challenge in growing its industrial estate land sales. Sales of industrial estates in 2017 are likely to be below our projection by about 20%, although Fitch still expects the growth in the company's industrial land sales over the next two to three years, driven by the government's new investment promotion policy. Fitch expects WHA's FFO adjusted leverage to be high at about 7.0x at end-2017 before decreasing to the range of 5.0x-5.5x over the medium term.
Successful Asset-Disposal Plan: WHA carried out its asset-disposal plan and a debt reduction of THB6 billion in 2016, leading to a decrease in FFO adjusted leverage to 5.4x by end-2016. It has also spun off 30% of its utility business, and reduced the debt by a further THB5 billion in April 2017. WHA has also completed its annual asset sales to the REITs and received the proceeds of THB4.7 billion in 2017 and January 2018. The company expects to continue selling THB3.5 billion-4.5 billion of its investment properties (excluding those under the JVs) a year to the REITs over the medium term.
More Integrated Business Model: The acquisition of Hemaraj Land and Development Plc. (Hemaraj) has strengthened WHA's market position in industrial property, supporting its leadership in the development of both premium built-to-suit warehouses for lease and industrial estates in Thailand. WHA plans to generate more recurring revenue by providing more integrated services to customers in the industrial estates, including data centre and managed services, internet services and IT outsourcing services. WHA's revenue has more than doubled while recurring revenue as a share of total revenue should rise to 30%-35% from 10% pre-acquisition in the medium term.
Greater Exposure to Cyclicality: The expansion into industrial estate development has increased WHA's exposure to the volatility of land sales and cyclicality of property demand, as well as stiffer competition. WHA's original business of developing premium built-to-suit warehouses for lease had limited its exposure to property market cycles, because the warehouses are pre-leased and have long-term contracts. The competition in this niche market is also relatively low.
DERIVATION SUMMARY
WHA has higher revenue and EBITDAR, and a more integrated business model than its property-investment peers. However, it also faces high development risk and volatility of land sales from its industrial estate business. TICON Freehold and Leasehold Real Estate Investment Trust (TREIT, A-(tha)/RWP), an industrial property REIT, is comparable with WHA's ready-built factories and warehouses for rent business. However, TREIT has no development exposure, with much lower financial leverage and higher financial coverage than WHA. This warrants TREIT's higher rating.
JWD InfoLogistics Public Company Limited (JWD, 'BBB+/Negative), a full-service in-land logistics provider, is not a property-investment company, but has similar characteristics. Unlike the pure property rental business, JWD's revenue is still exposed to the volume and activities of customers, although its earnings are somewhat supported by long-term contracts. WHA and JWD are rated at the same level, with JWD's lower financial leverage and higher financial coverage. The business profile of Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), as a community mall developer, is similar to the rental business of WHA but in the retail industry instead of industrial. WHA is rated higher than SF, with a similar range of financial leverage.
KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include:
- Marginal growth in rental and service income in 2017, given large sales of investment properties in 2016, and 15%-20% growth a year in 2018 and 2019 from increasing water business and new digital infrastructure business;
- A land transfer of 1,000-1,100 rai in 2017 and 1,300-1,350 rai a year in 2018-2019;
- Sales of investment properties of THB3.5 billion to THb4.5 billion (excluding sales by JVs) a year in 2018-2019 (in addition to sales of investment properties of THB1.6 billion completed in early January 2018);
- EBITDAR margin to decrease to 38%-40% in 2017-2019 due to lower high-margin sales of Hemaraj's investment properties;
- Capex spending including project development cost and investment in power affiliates of about THB7.5 billion a year in 2017-2019.
RATING SENSITIVITIES No longer relevant as the ratings have been withdrawn.
LIQUIDITY
Manageable Liquidity: WHA had total debt of THB36 billion at end-September 2017. THB6.3 billion will be due within the next 12 months from end-September 2017. The liquidity should be supported by a cash balance and short-term investment of THB2 billion as well as proceeds from sales of investment properties of THB4.7 billion in December 2017 and January 2018. The company also has ability to access to the capital market.