Bangkok--2 May--TRIS Rating
TRIS Rating affirms the company rating of CH. Karnchang PLC (CK) and the ratings of CK's outstanding senior unsecured debentures at "A-". At the same time, TRIS Rating assigns a rating of "A-" to CK's proposed issue of up to Bt4,000 million in senior unsecured debentures, due within five years. The company will use the proceeds from the new debentures to refinance the existing debentures.
The ratings reflect CK's position as a top-tier contractor, its ability to undertake large-scale and sophisticated construction projects, as well as the synergy and financial flexibility the company gains from its strategic investments. However, the ratings are constrained by the company's high leverage, as well as the cyclicality of and competitive threats in the engineering and construction (E&C) industry.
CK's operating performance in 2017 was in line with TRIS Rating's expectation. Revenue came in at Bt36 billion, down 21% from the previous year. Revenue in 2016 was record-high at Bt45.8 billion, around half of which was contributed by the Xayaburi hydropower dam project. The gross profit margin in 2017 increased to 8.3%, from 7.2% in 2016. CK's funds from operations (FFO) in 2017 increased to Bt2.8 billion, up from Bt1.5 billion in 2016.
CK's backlog at the end of 2017 stood at Bt72.2 billion. Major projects in the backlog include the MRT Orange Line project contracts worth a combined value of Bt25.5 billion, the maintenance and engineering (M&E) equipment contract for the MRT Blue Line worth Bt16.1 billion, and the Xayaburi hydropower dam project worth Bt13.9 billion. These three projects account for 77% of the company's total backlog value.
At the end of 2017, CK's debt to capitalization ratio was 62.21%, down from 72.39% in 2016. This ratio improved after CK transferred the project loan of the MRT Purple Line project to Bangkok Expressway and Metro PLC (BEM), which was in line with TRIS Rating's expectation. Nevertheless, the debt to capitalization ratio is expected to remain elevated, taking into consideration working capital needs and the sponsor loan to the Xayaburi project.
RATING OUTLOOK
The "stable" outlook reflects TRIS Rating's expectations that CK will remain highly competitive in securing new projects. In the base case scenario, TRIS Rating assumes CK's revenue will be around Bt35-Bt38 billion per annum during 2018-2020. CK's strong backlog should secure future revenue. Moreover, CK could sustain its gross margin above 8% on average despite stiff competition and the total debt to capitalization ratio could stay below 65% over the next three years.
RATING SENSITIVITIES
A credit upside is possible if CK could significantly enhance cash flow protection by generating stronger-than-expected FFO, as well as maintain its debt to capitalization ratio below 60% for a sustained period.
A credit downside will be caused by significant cost overruns in major projects or unanticipated, extensive financial support provided to its affiliates, which would markedly hurt CK's cash flow.
CH. Karnchang PLC (CK)
Company Rating: A-
Issue Ratings:
CK187A: Bt1,000 million senior unsecured debentures due 2018 A-
CK188A: Bt1,000 million senior unsecured debentures due 2018 A-
CK193B: Bt1,500 million senior unsecured debentures due 2019 A-
CK197A: Bt2,500 million senior unsecured debentures due 2019 A-
CK198A: Bt500 million senior unsecured debentures due 2019 A-
CK20NA: Bt1,000 million senior unsecured debentures due 2020 A-
CK215A: Bt2,250 million senior unsecured debentures due 2021 A-
CK233A: Bt4,000 million senior unsecured debentures due 2023 A-
CK245A: Bt1,600 million senior unsecured debentures due 2024 A-
CK247A: Bt1,500 million senior unsecured debentures due 2024 A-
CK25NA: Bt1,000 million senior unsecured debentures due 2025 A-
CK267A: Bt2,700 million senior unsecured debentures due 2026 A-
CK275A: Bt1,150 million senior unsecured debentures due 2027 A-
CK283A: Bt800 million senior unsecured debentures due 2028 A-
CK295A: Bt1,000 million senior unsecured debentures due 2029 A-
Up to Bt4,000 million senior unsecured debentures due within 5 years A-
Rating Outlook: Stable