Bangkok--13 Mar--Fitch Ratings
Fitch Ratings (Thailand) Limited has today downgraded Thailand-based Land and Houses Public Company Limited (LH) to National Long-term ‘BBB+(tha)’ from ‘A-(A minus)(tha)’. Meanwhile, LH’s National Short-term rating was affirmed at ‘F2(tha)’. The rating Outlook is Stable.
The downgrade reflects LH’s weaker-than-expected earnings performance in 2008 due to the impact of weaker homebuyer sentiment in light of political instability. It also factors in the company’s downward revision of its earnings forecasts for 2009-10 given deteriorating industry prospects, which will likely weaken LH’s credit profile over the next 18-24 months, while reducing financial flexibility.
LH reported a 15.7% yoy decline in its revenue to THB15.8bn in 2008. Although operating EBITDAR still increased by 4% yoy to THB3.8bn in 2008, thanks to the implementation of the government’s tax incentive programme, this was substantially below Fitch’s expectations. Together with a large dividend payout which resulted in substantial negative free cash flows, its financial leverage, measured by adjusted net debt to EBITDAR ratio, increased to 3.8x at end-2008 from 3.4x at end-2007, which is inconsistent with the previous ‘A-(A minus)(tha)’ rating.
Based on Fitch’s revision of 2009 GDP forecast for Thailand to minus 2.9% given the impact from global economic recession, overall housing demand in Bangkok Metropolitan Area (BMA) is projected to sharply decline this year. LH will likely see a slip in earnings in 2009, although some positive developments i.e. declining construction costs, lower interest rates and the government’s new stimulus programme aimed at boosting property demand, should partially mitigate the risk. LH’s financial leverage is expected to further weaken to 4x-4.5x during 2009-10 given expected slower earnings and remaining high dividend payout of 80%. LH’s liquidity, however, should remain adequate, supported by a cash balance of THB1.2bn and its remaining undrawn committed credit facilities from local financial institutions of about THB2.5bn at end-2008.
Partially mitigating these risks is LH’s ability to further gain market share from smaller single detached houses (SDH) developers, its focus on cash flow management with moderate project expansion and its substantial holding of liquid assets. The ratings are also underpinned by the track record of LH’s senior management.
The Stable Outlook reflects Fitch’s expectation that LH’s dominant market position with strong brand recognition, along with the above-mentioned strengths, should help maintain its liquidity and financial flexibility consistent with the ‘BBB+(tha)’ rating over the medium term. Sustained improvement in LH’s operating performance and a financial leverage of below 3x should positively affect the ratings. Conversely, weaker-than-expected EBITDAR and liquidity profile, as well as higher-than-expected net debt from substantial dividend payment or capital injection in affiliates could negatively affect the ratings.
Contacts:
Wasant Polcharoen, Somruedee Chaiworarat, Vincent Milton, Bangkok, Tel: +662 655 4755
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.
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