TRIS Rating Affirms Company Rating and Outlook 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-income segments of the residential property development market, ability to keep construction costs at competitive levels, and conservative financial policies. The rating also takes into consideration MK’s relatively small revenue base, the cyclical nature of the property development industry, concerns over rising construction costs and the current labour shortage, and the expected slowdown in demand for residential property due to political instability. The “stable” outlook reflects the fact that MK’s operating performance rebounded to a normal level in 2013. Going forward, the company’s revenue is expected to hold at Bt2,000-Bt2,500 million per year. The debt to capitalization ratio should be kept below 30%. MK’s rating and/or outlook could be lowered if the company’s operating performance drops significantly from the current level. On the other hand, the rating could be upgraded if the company can increase its market share and maintain its sound financial status.

MK 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 27% as of December 2013. The company’s main activity is building low-rise residential property projects in the Greater Bangkok area. MK’s products include single detached houses (SDHs), townhouses, and condominiums. The company also sells land plots, with prices ranging from Bt15,000 to Bt50,000 per square wah (sq.w.). The housing units remain the major source of revenue, contributing 90% of total revenue in 2013. As of December 2013, MK had 18 projects available for sale. The units in these projects have a remaining value of Bt5,145 million in total. The company had a backlog worth Bt722 million. MK’s competitive edge stems from its cost competitiveness, which enables the company to achieve favorable profit margins. MK’s operating margin, as measured by operating income before depreciation and amortization as a percentage of sales, ranged from 18%-20% during 2011 through 2013, higher than the yearly averages of 14%-17% for 16 rated developers.

In 2013, MK’s revenue reached a record level. Total revenue increased 60% to Bt2,760 million from Bt1,724 million in 2012. The leap in revenue was due to the transfer of units in the DEN Vibhavadi project worth Bt851 million. Presales in 2013 also increased, climbing to Bt2,094 million from Bt1,784 million in 2012. Presales rose as sales of its low rise projects increased. Buyers now have less concern over flooding than in the immediate after-math of the 2011 flood.

MK’s gross profit margin dropped to 34% in 2013 from 38% in 2012. The fall in the gross profit margin was due to a lower gross profit margin for the DEN Vibhavadi project. The gross profit margin of the DEN Vibhavadi project was around 30%. The sharp increase in revenue in 2013 caused MK’s operating profit margin to increase to 19.73% from 18.44% in 2012. MK’s financial leverage also improved. As of December 2013, total debt decreased to Bt920 million, from Bt1,768 million in 2012. The debt to capitalization ratio decreased from 26.10% in 2012 to 14.83% in 2013. As a result, MK’s liquidity profile improved significantly from the prior year. The funds from operations (FFO) to total debt ratio increased to 53.86% in 2013 from 15.75% in 2012. The earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage ratio stood at 8.53 times in 2013, up from 4.70 times in 2012.

TRIS Rating Co., Ltd./www.trisrating.com Contact: [email protected], Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2014, 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.