TRIS Rating Affirms Company & Senior Debt Ratings of “LH” at "A", Assigns “A” Rating to Proposed Up to Bt4,000 Million Senior Debt, and Affirms "Stable" Outlook

TRIS Rating has affirmed the company rating of Land & Houses PLC (LH) and the ratings of its existing senior debentures. At the same time, TRIS Rating has assigned the rating of “A” to LH’s proposed issue of up to Bt4,000 million in senior debentures. The outlook remains “stable”. The proceeds from the new debentures will be used for debt refinancing and business expansion. The ratings reflect the company’s leading position in the residential property development market, strong brand franchise, and proven operational track record. The ratings also take into consideration financial flexibility from portfolio of income-generating assets and marketable securities. However, the ratings are partially constrained by the cyclical nature of the property development industry, pressures from construction costs and market competition, and LH’s moderate financial leverage. The “stable” outlook reflects an expectation that LH will sustain its market competitiveness with product offerings that match market dynamism. The ratings could be negatively impacted should the company’s debt to capitalization ratio rise to stay above 50%, or total debt to equity above one time, for sustained periods.

LH is one of Thailand’s leading property developers. The company’s total assets at the end of 2012 stood at Bt65.1 billion, ranked the largest among residential property developers listed on the Stock Exchange of Thailand (SET). The company’s revenue in 2012 at Bt24.1 billion was ranked the third largest. LH was established in 1983 by the Asavabhokhin family. As of July 2013, the Asavabhokhin family held 31% of the company’s shares, followed by the Government of Singapore Investment Corporation (GIC) at 16%. LH’s core products are single detached houses (SDH), contributing 65%-75% of total sales over the past three years. Meanwhile, SDHs pricing Bt3-Bt7 million per unit comprised 40%-50% of LH’s total sales. LH’s very strong business profile is underscored by its residential brand equity with premium market perceptions in terms of product quality and after-sale services. The company has succeeded in offering several SDH brands under various price ranges and customizing products to suit buyer affordability and characteristics for each location. LH’s market strength also reflects the company’s respectable sale records. LH’s sales in 2012 stood at Bt25 billion, growing 16% annually on average over the past three years.

At the end of March 2013, LH’s condominium backlog was Bt7.1 billion. The backlog of Bt2 billion is expected to be transferred in the last three quarters of 2013, another Bt4 billion in 2014, and the remaining Bt1.1 billion in 2016. Over the next three years, TRIS Rating’s base-case scenario expects LH’s revenues in a range of Bt24-Bt27 billion per annum. LH’s operating margin (operating income before depreciation and amortization as a percentage of revenue) was 24.7% in the first half of 2013 and 21.9% in 2012. LH’s operating margin is expected to stay at least around 18%-19% for the next three years, factoring in pressures from rising construction costs, market competition, as well as overhead expenses to support business expansion.

LH’s moderate leverage level is partly offset by the holding of sound income-generating assets and sizable marketable securities. LH’s debt to capitalization ratio at the end of June 2013 stood at 46.4%. LH’s covenant limits its liabilities (minus account payable) to equity ratio at 1.5 times. At the end of June 2013, the ratio stood at 0.95 times. TRIS Rating expects LH’s debt to capitalization ratio to stay at around 45%-50% for the next three years, considering consecutive launch plans for high-rise projects and aggressive dividend policy. The company’s financial flexibility is enhanced by a portfolio of investments in listed associates with fair value at Bt42.2 billion at the end of June 2013. LH’s liquidity profile is acceptable. Long-term debts maturing over the next three years are Bt5-Bt10 billion per annum. For the next three years, TRIS Rating expects LH’s funds from operations (FFO) to total debt to stay above 10%, while EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage to stay above five times. The ratings do not reflect potential credit upside from asset divestments, given uncertainties in timing and valuation. In addition, the credit upside expected from improving capital structure could be neutralized if LH’s business expansion is expected to raise the debt to capitalization back to the range of 40%-50%.

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