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

TRIS Rating Co., Ltd. has affirmed the company rating of Sino-Thai Engineering & Construction PLC (STEC) to “A-” from “BBB+”. The outlook remains “stable”. The upgrade reflects STEC’s cost efficiency, strong balance sheet, and its ability to secure a significant number of public and private projects. The rating also takes into consideration the company’s leading market position as one of Thailand’s top three construction contractors, its specialization in the construction of power and petrochemical plants, lengthy track records in both the private and public sectors, and readiness to reap the benefits from government infrastructure investments. However, these strengths are partially offset by the risks of cost overruns, in particular for lengthy fixed-unit price contracts, exposure to the volatile and cyclical engineering and construction (E&C) industry, and concern over its expansion into the property development business. The “stable” outlook reflects TRIS Rating’s expectation that STEC will continue its cost control practices. In addition, STEC’s ample liquidity and relatively strong balance sheet should help mitigate the risk of cost overruns from project delays and other unforeseen event risks. STEC’s debt to capitalization ratio is expected to remain below 50% over the next few years, though the company plans to expand into the property development business.

TRIS Rating reported that STEC is the leading construction contractor in Thailand with the leading market positions in both private and public works construction. The company is ranked as a class 1 licensed contractor for all government authorities and state enterprises. STEC is one of the few prequalified contractor companies which is able to bid for large public projects. Based on its proven track record and strong support from financial institutions, STEC has a good chance to win bids for several mega projects which are expected to be launched during the next few years. Since 2009, STEC has won four out of eleven contracts in mass transit projects. In addition to infrastructure construction, the company is known for its specialization in constructing power plants and petrochemical plants, plus piping and steel structure fabrication. Throughout 2010 and the first nine months of 2011, STEC acquired nine power plant construction contracts.

As of September 2011, STEC’s backlog was valued at Bt52,035 million, up 147% from Bt21,049 million as of December 2010. A backlog this size accounts for 5.6 times 2010 revenue. The high backlog will guarantee STEC’s cash flow streams for at least the next three years. Approximately 40% of the backlog is high margin projects in the energy segment. The proportion of high margin projects on hand, as well as STEC’s strong bargaining power with suppliers, should help reduce the negative impact of rising construction materials and labor costs.

TRIS Rating said about STEC’s financial profile that it is very strong, reflecting a low level of leverage and strong cash balances. Cash on hand and marketable securities at the end of September 2011 stood at Bt4,309 million while outstanding debt was only Bt322 million. The total debt to capitalization ratio was as low as 5.42% at the end of September 2011 while the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio during the first nine months of 2011 rose to 107.64 times, from 79.4 times in 2010. Although its operating margin will likely soften in 2012 due to pressure from raw material price and labor cost rises, operating income as a percentage of sales is expected to hold at 5%-7%.

The severe flood which hit Bangkok and the surrounding provinces has delayed the construction of the Purple Line and the Blue Line mass transit projects for about one month. However, there was no significant damage to STEC’s construction sites. Although the effect of the flood will lower STEC’s earnings in the last quarter of 2011, the impact should not be significant. In addition, the damages from the flood should be partly covered by insurance, said TRIS Rating. -- End

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