TRIS Rating Upgrades Company Rating of “STEC” to “BBB+” from “BBB” with “Stable” Outlook

TRIS Rating Co., Ltd. has upgraded the company rating of Sino-Thai Engineering & Construction PLC (STEC) to “BBB+” from “BBB” with “stable” outlook. The upgrade reflects STEC’s significantly improved financial profile, which is expected to remain solid over the next several quarters, underpinned by strong backlog and high liquidity position. The rating also takes into consideration the company’s market position as one of Thailand’s top three construction contractors, specialization in power and petrochemical plants construction, lengthy track records in both the private and public sectors, and readiness to reap the benefits from government infrastructure investments designed to boost the economy. However, these strengths are partially offset by the risks of cost overruns, in particular for long duration fixed-unit-price contracts, high backlog concentration, and exposure to volatile and cyclical engineering and construction (E&C) business.

The “stable” outlook reflects TRIS Rating’s expectation that STEC will continue to implement cost control practices. In addition, its ample liquidity and relatively strong balance sheet should help mitigate the risk of cost overruns from project delays and other unforeseen event risks better than before.

TRIS Rating reported that STEC is a leading construction contractor in Thailand with a strong market position in both private and public works construction. The company is ranked as a class 1 licensed contractor for almost all government authorities and state enterprises. Although the industry is fragmented, STEC benefits from the high barriers to entry as it is one of the few prequalified contractors being able to bid for large public projects. Based on its proven track record and strong support from financial institutions, STEC has a better chance to win bids for several mega projects under the government economic stimulus package. Since 2009, STEC has won two out of nine contracts in electric train projects launched lately. In addition to infrastructure construction, the company is known for its specialization in power plants and petrochemical plants construction, piping and steel structure fabrication & erection works. Since 2008, Electricity Generating Authority of Thailand (EGAT) has signed power purchase agreements with four independent power producers and 15 small power producers. STEC expects to acquire several contracts under power plant projects which are anticipated to be executed soon after delaying for a few years.

TRIS Rating said, as of July 2010, STEC’s backlog was valued at Bt15,712 million, down 9% from Bt17,186 million as of December 2009. However, if the awarded projects not yet signed are included in the backlog, the total backlog will increase to Bt36,359 million, the highest level since its inception. The high backlog will guarantee STEC’s cash flow stream for the next three years.

TRIS Rating also said that STEC’s financial profile has improved continuously since 2008, supported by strengthening operating performance and significant debt reduction. STEC’s operating margin for the first half of 2010 improved to 10.17%, compared with 5.29% in the same period of the prior year as unprofitable projects completed. However, TRIS Rating anticipated that margin is likely to soften due to pressure from up cycle of construction material prices. Nevertheless, STEC is in a better position to weather this risk based on its excellent liquidity position. STEC’s balance sheet was very strong, with debt staying at Bt176 million as of June 2010, down from Bt230 million at the end of 2009. With better operating performance and less debt, funds from operations (FFO) for the first half of 2010 was 2.5 times of outstanding debts. The total debt to capitalization ratio was as low as 3.82% at the end of June 2010 while the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio during the first six months of 2010 rose to 58.64 times, from 27.06 times in 2009. -- End

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