TRIS Rating Affirms Company Rating of "STEC" at “A-/Stable”

TRIS Rating has affirmed the company rating of Sino-Thai Engineering & Construction PLC (STEC) at “A-” with “stable” outlook. The rating reflects STEC’s leading market position as one of Thailand’s top three construction contractors, strong financial profile, the large and diversified backlog, and lengthy track records in both the private and public sectors. However, these strengths are partially offset by the risks of cost overruns, in particular for lengthy fixed-unit price contracts, as well as the exposure to the volatile and cyclical engineering and construction (E&C) industry, and its plan to expand into the property development business. The “stable” outlook reflects TRIS Rating’s expectation that STEC will continue its cost control practices. The company is expected to maintain its financial strength to contend the risk from rising construction costs, and/or cost overrun from project delays, and other unforeseen event risks.

STEC is the leading construction contractor in Thailand with strong market positions in both private and public sectors. The company is ranked as a class 1 licensed contractor for all government authorities and state enterprises. STEC is one of the few prequalified construction contractors 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 infrastructure projects which are expected to be launched during the next few years. 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. In the past two years, STEC acquired nine power plants construction contracts worth more than Bt20,000 million.

As of September 2012, STEC’s backlog was Bt63,094 million, including Bt18,539 million in awarded projects waiting to be signed, up 28.9% from Bt48,935 million as of December 2011. A backlog of this size accounts for 4.26 times the company’s 2011 revenue. The high backlog will guarantee STEC’s revenue for at least the next three years. Approximately 58% of the backlog is mass transit projects and 21% is high-margin power plant projects. 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 the rising costs of construction materials and labor.

For the first nine months of 2012, STEC showed the highest profitability among the top tier contractors which have taken large public infrastructure projects. STEC’s operating margin before depreciation and amortization expenses was around 7.5% in 2011 and the first nine months of 2012. The company’s financial profile has improved steadily, thanks to its strong profitability and low leverage. The total debt to capitalization ratio has been kept below 10% since the second quarter of 2009. STEC’s liquidity position is strong. The company benefits from its low need for capital expenditure and its modest working capital requirements. STEC’s working capital needs are supported in part by advance payments from project owners and suppliers’ credit.

The flood crisis in Bangkok and the surrounding provinces in the last quarter of 2011 had a minimal impact on STEC’s overall construction costs. STEC’s mass transit projects were in the flooded areas and were affected by the flood. The flood delayed the company’s construction work. However, STEC is entitled to receive a 180-day extension for the construction period of the public projects that were in flooded areas.

TRIS Rating Co., Ltd./www.trisrating.com Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.