Bangkok--17 Aug--TRIS Rating
TRIS Rating Co., Ltd. has affirmed the company rating of Italian-Thai Development PLC (ITD) at “A-” with “stable” outlook. The rating reflects ITD’s strong position as the largest general construction contractor in Thailand, its strong backlog, broad product line, geographic diversity and backward integration, and the prospects for the Thai engineering and construction (E&C) industry in the medium- to long-term. These strengths are partly offset by the cyclical nature of the E&C industry, intense competition in the market, and ITD’s increasing financial leverage.
While the “stable” outlook reflects the expectations that ITD will maintain its competitive position as Thailand’s largest construction contractor and will be able to maintain its profitability, despite difficult business conditions in the domestic construction market. However, if the company’s financial profile weakens substantially due to its aggressive using of debt to fund new projects, the rating or outlook may be revised.
TRIS Rating reported that ITD is Thailand’s largest construction contractor. In 2005, ITD’s total revenue of Bt37,985 million was almost three times the revenue of Thailand’s second largest construction contractor. The company operates nine business divisions, two foreign branches in Taiwan and the Philippines, and a construction subsidiary in India. Revenue from public construction projects is, and will continue to be, a majority contributor to ITD’s revenue. Although many infrastructure mega projects have been delayed due to the unfavorable political environment, ITD’s backlog increased from Bt41,397 million at the end of 2005 to Bt81,941 million as of May 2006. Approximately 90% of ITD’s backlog was public projects and 76% was domestic projects. ITD’s competitive advantages include its strong track record, good relationships with both private and public sector clients, economies of scale, self-sufficiency in key materials, an extensive machinery and equipment fleet, and adequate supply of skilled labor and engineers.
TRIS Rating said, although the industry is fragmented, a few major contractors benefit from the high barriers to entry, particularly for large public projects, only pre-qualified contractors are able to bid on public projects. Therefore, the three largest contractors will continue to enjoy rising backlogs based on their proven track record and strong financial standing. The top three contractors are likely to win bids for several of the government mega projects that are expected to be launched during the next five years.
Transport infrastructure projects and turnkey building projects, for which ITD has expertise, a strong track record, and machinery, should drive the company’s growth in the medium term. ITD’s strategy to diversify revenue base abroad should help the company maintain its sales volume during any slowdown in the domestic construction market.
ITD has rapidly expanded over the past few years. Its total capital spending was Bt7,653 million during the past three years, funded with debt, cash flow from operations, and proceeds from a capital injection. As of March 2006, the company’s total debt to capitalization ratio and funds from operations (FFO) to total debt ratio were 38.7% and 5.3% (non-annualized), respectively. The company’s financial leverage and cash flow protection is expected to weaken in the near term as a result of debt-funded financing of a potash project. The adjusted operating margin decreased slightly from 7.2% in 2005
to 7.1% in the first quarter of 2006, said TRIS Rating.