Bangkok--Jun 3--Fitch Ratings
Fitch Ratings (Thailand) Limited has today affirmed the ratings on Land and Houses Public Company Limited (“LH”) at National Long-term ‘A-(tha)’ (A minus (tha)) rating with a Stable Outlook and National Short-term ‘F2(tha)’. The ‘A-(tha)’ rating on the company’s series of bills of exchange, was also affirmed.
The ratings reflect LH’s dominant market position in residential development in Thailand, its strong brand name and experienced senior management, as well as its relatively strong balance sheet and operating cash flow generation, although the latter has weakened slightly since 2004. In general, LH’s extensive land bank and economies of scale enable it to better manage margins and cash flow compared to its peers. Although its pre-built development strategy increases inventory risks during a downside, it also helps control margins. The ratings also take into account the high cyclicality of the residential development business. Slower inventory turnover due to increased competition and rising material and land costs may put pressure on LH’s profitability, while sustained high oil prices, rising interest rates and weakening economic growth may also impact housing demand. Moreover, LH’s large dividend payout weakened its creditor protection ratios in 2004. A continuing high dividend payout without maintaining appropriate cash flow leverage will result in increasing leverage, as would further investments in other businesses, which may result in a lowering of its credit rating.
Recently, LH agreed to increase its stake in Land and Houses Credit Foncier (“LHCF”, which is in the process of acquiring Bookclub Finance Plc’s assets and liabilities and being granted a bank license) to 43% with an acquisition cost of THB661 million. Although the acquisition cost appears moderate, LH’s diversification to financial services raises medium-term risks given its lack of track record in banking and the potential for credit risks to be mismanaged requiring further capital support from LH. The Stable Outlook for the ratings is based on LH’s relatively strong position in the residential development market to manage its earnings and cash flow and expectation that LH will maintain its appropriate cash flow leverage.
LH’s operating cash flow turned negative in 2004 due to a substantial increase in working capital to fund project expansion and land bank acquisition. Together with high dividend payout, its net operating cash flow (post-dividend) was negative THB9.3 billion in 2004. Its total debt rose to THB10.7bn at end-1Q05, 39% of which was short-term and the remainder, long-term. Despite having cash balances of only THB849m at end-1Q05, its liquidity is partly supported by a THB1.5bn credit line from local banks, its ability to access capital market and its existing investments. In April 2005, LH issued THB5.0bn of debentures partly for short-term debt refinancing. LH’s net operating cash flow will likely remain weak in 2005, which could result in a further increase in LH’s net debt. However, it should still be in the manageable level of 2.5x of expected 2005 EBITDA.
Established in 1983, LH is the largest player in residential housing development in Thailand, focusing on mid- to high-end single detached house (“SDH”) projects in the Bangkok metropolitan area. The founder, Mr. Anant Asavabhokin, remains the largest shareholder with a stake of 31.6%, followed by the Government of Singapore Investment Corporation (14.1% holding).
A copy of the full report is available on www.fitchratings.com
CONTACT: Lertchai Kochareonrattanakul Tel: +662 655 4760; Wasant Polcharoen +662 655 4766; Vincent Milton +662 655 4759.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with sub- or low-investment grade international sovereign ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable. End.