TRIS Rating Affirms Company Rating of "MK" at "BBB+/Stable"

TRIS Rating has affirmed the company rating of M.K. Real Estate Development PLC (MK) at “BBB+” with “stable” outlook. The rating reflects MK’s long track record in the middle- to low-income segments of the residential property development market, ability to continuously manage construction costs at competitive levels, and conservative financial policies. The rating also takes into consideration the cyclical nature of the property development industry and concerns over rising construction costs and the current labor shortage. The “stable” outlook reflects TRIS Rating’s expectation that the sharp drops in MK’s sales and profitability should be temporary. Annual sales should be back to a normal level of Bt2,000-Bt2,500 million in 2013. Leverage is not expected to rise higher than its current level. However, MK’s rating and/or outlook could be lowered if its operating performance does not recover to normal levels and its financial leverage is higher than expected.

MK is a medium-sized property developer with a long presence in the industry. It was established in 1973 and listed on the Stock Exchange of Thailand (SET) in 1990. The Tangmatitham family has continued to be the company’s major shareholder, with a combined stake of 26% as of August 2012. The company mainly develops low-rise residential projects in Greater Bangkok. MK’s products include single detached houses (SDHs) and duplex units with average price of Bt3.4 million per unit in 2012. The average prices for townhouses were Bt2.2 million for a two-storey unit and Bt3.8 million for a three-storey unit. The average selling price for MK’s condominium was Bt1.15 million per unit. The company also sells land plots, with prices ranging from Bt15,000 to Bt50,000 per square wah (sq.w.). Housing unit sales remained the major source of revenue, contributing 86% of total revenue in 2012. As of December 2012, MK had 19 existing projects available for sale, with a remaining value of Bt4,000 million. The company had a backlog worth approximately Bt1,300 million. MK’s competitive edge stems from its cost competitiveness, which enables the company to achieve favorable profit margins.

MK’s presales decreased to Bt1,784 million in 2012, down by 14% from Bt2,076 million in 2011. The fall in presales was due partly to concerns over a flood during the second half of 2012, plus delays in some new project launches as a result of construction problems. Although total revenue rose to Bt1,724 million in 2012 from Bt1,673 million in 2011, revenue in 2012 was lower than expected due in part to construction delays in the DEN Vibhavadi project. Because of the delays, the company had to postpone the transfer of this project from 2012 to the first quarter of 2013.

MK’s gross profit margin has remained high, at 38%-40% of sales in 2010 through 2012. The operating profit margin slightly decreased in 2012, falling to 18.44% from 19.62% in 2011. As of December 2012, total debt increased to Bt1,768 million, from Bt1,267 million in 2011. The lower operating performance and higher debt levels lowered MK’s cash flow protection in 2011 and 2012. As a result, the ratio of funds from operations (FFO) to total debt was 16.72% in 2011 and 15.75% in 2012, down from 56.91% in 2010. The earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage ratio stood at 6.66 times in 2011 and 4.70 times in 2012, down from 24.11 times in 2010. However, MK has undrawn committed credit facilities of around Bt1,000 million and a low level of financial leverage (26.10%) at the end of 2012. Because of these cushions, the company’s financial flexibility remained acceptable.

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