Bangkok--11 Jan--TRIS Rating
TRIS Rating Co., Ltd. has revised the rating outlook of Italian-Thai Development PLC (ITD) to “negative” from “stable”. The revised outlook reflects the concerns of TRIS Rating about ITD’s medium-term profitability. At the same time, TRIS Rating affirms the company and issue ratings of ITD at “A-”. The ratings reflect the company’s strong position as the largest general construction contractor in Thailand, its strong backlog, broad product line, as well as track record and expertise to perform large and complex projects. The ratings also take into consideration the cyclical nature of the engineering and construction (E&C) industry, intense competition, and the company’s increasing financial leverage.
The “negative” outlook reflects TRIS Rating’s concerns about ITD’s medium-term profitability.
The longer delays for government spending projects as well as weak overseas operating performance will constrain the company’s efforts to restore profitability. ITD’s credit ratings shall be revised downward if the company’s financial performance does not recover to acceptable levels.
TRIS Rating reported that for the first nine months of 2006, ITD had a net loss of Bt1,420 million. The loss was mainly due to a huge provision for a potential construction loss and contingent liabilities on a special purpose vehicle (SPV). Under the facility agreement between the company and the SPV, ITD has an obligation to extend a loan to SPV in case that SPV does not have enough cash to repay debts to creditors. As at September 2006, the SPV had outstanding loans worth Bt1,963 million and foreclosed assets for sale amounting to Bt936 million. At present, ITD has set aside Bt815 million as an allowance for this contingent liability.
ITD’s results from construction activities in the third quarter of 2006 were far weaker than TRIS Rating’s expectations. The main loss came from the Kol Dam project in India. ITD estimated the cost overrun on the Kol Dam project to be approximately Bt1,200 million from a potential construction delay of two years and unsettled variation orders. The company had set a provision of Bt758 million for the potential loss while Bt442 million has already been recognized as a cost. Though the company intends to seek reimbursement for the higher costs from the sponsor, recovery is still uncertain. The loss on Kol Dam project should not have a major impact on ITD’s performance as it accounted for 5.8% of ITD’s total backlog of Bt84,347million as of November 2006. The poor performance of a subsidiary, ITD Cementation India (ITDCEM), a construction company in India, hurt profitability. ITDCEM had construction revenue of approximately Bt3,160 million and net loss of Bt35 million for the first nine months of 2006. The loss was mainly due to high interest expenses. ITD is considering raising ITDCEM’s capital to reduce leverage. Nonetheless, the process will take time and may be completed in the second half of 2007.
TRIS Rating estimates that a slowdown in private construction as well as delays in government projects will intensify competition in the E&C industry. In addition, low-margin orders, which constitute approximately 30% of the total backlog including loss-making of the Kol Dam project will restrain the overall margin. The challenge for ITD is to control costs and maintain bidding discipline by focusing on profitability rather than business volume. Apart from construction costs, financing costs are also a major burden. ITD’s interest expense increased considerably from Bt589 million in 2005 to Bt664 million for the nine months ended September 2006. The surge in interest expense was due to higher loan balances and
higher interest rates. The increasing loans were used to finance business expansion and acquisitions.
TRIS Rating’s concern is the acquisition of a potash project funded by loan from Siam Commercial Bank PLC (SCB). Though the business has potential, it is uncertain when the mining license will be granted. The longer the wait, the higher the interest burden, said TRIS Rating.