TRIS Rating Affirms Company & Senior Unsecured Debt Ratings and Outlook of “LH” at “A+/Stable”

TRIS Rating has affirmed the company rating of Land & Houses PLC (LH) and the ratings of its existing and proposed issue of senior unsecured debentures at “A+” with “stable” outlook. The ratings reflect LH’s leading position in the residential property development market, supported by its strong brand franchise and proven operational track record. The ratings also take into consideration the financial flexibility LH derives from its portfolio of income-generating assets and marketable securities. However, the ratings are partially constrained by a moderate level of financial leverage and an aggressive dividend policy. In addition, the relatively high level of household debt nationwide, coupled with the current slowdown in the domestic economy, raise a concern over the demand for housing in the short to medium term.

The “stable” outlook reflects the expectation that LH will maintain its strong operating performance, acceptable financial position, and competitive position. Over the next three years, LH’s revenue is expected to range from Bt28,000-Bt32,000 million per annum. The interest-bearing debt to equity ratio should stay below 1 times.

LH’s ratings and/or outlook could be revised downward should its operating performance or financial position significantly deteriorate from the current levels. The ratings and/or outlook could be revised upward should its capital structure improve significantly from the current level and its operating performance remains strong comparable with its listed peers.

LH is one of Thailand’s leading property developers. The company’s revenue was Bt26,260 million in 2015 and Bt15,433 million in the first six months of 2016, ranking it as one of the three largest listed property developers based on revenue. As of August 2016, 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), sales of which comprised 65%-70% of total revenue annually over the past five years.

LH’s strong business profile is underscored by its brand equity. Its products are perceived as premium residential properties in terms of product quality and after-sale service. The company offers several low-rise and high-rise housing brands, across a wide price range, in various locations. The company has a quite strong position in the SDH segment. Presales in the SDH segment was Bt18,244 million in 2015, up 3% year-on-year (y-o-y). However, the company didn’t launch any new condominium projects in 2015. As a result, condominium presales dropped by 60% y-o-y. Overall, presales during the first half of 2016 was Bt11,311 million, a small growth from the same period of 2015, led by the rise in SDH presales.

As of June 2016, LH’s backlog was Bt17,540 million. Units in the backlog worth Bt6,000 million will be transferred to customers during the remainder of 2016, followed by transfers worth Bt11,000 million in 2017. TRIS Rating’s base case scenario expects LH’s revenues will range from Bt28,000 million to Bt32,000 million per annum over the next three years. LH’s operating profit margin (operating income before depreciation and amortization, as a percentage of revenue) ranged from 22%-25% during 2012 through the first six months of 2016. The operating profit margin is expected to stay above 20% over the next three years, due to pressures from rising land costs, market competition, and overhead expenses needed to support LH’s expansion plans.

LH’s debt to capitalization ratio was 47% as of December 2015 and 45% as of June 2016. LH’s bond covenant limits the interest-bearing debt to equity ratio at 1.5 times. At the end of June 2016, the ratio stood at 0.8 times. Despite its plans to invest in recurring-income assets and its aggressive dividend payments, LH’s debt to capitalization ratio is expected to remain below 50%, or the interest-bearing debt to equity ratio below 1 times. LH’s moderate leverage level is partly offset by its holdings of sound income-generating assets and a sizable portfolio of marketable securities. The fair value of LH’s investments in listed associates was Bt55,000 million as of June 2016. Equity income from investments amounted to Bt2,000-Bt2,400 million per annum during 2012-2015.

LH’s liquidity profile is adequate. The company is able to access the capital market and achieve lower funding costs than its bank loan borrowings. The ratio of funds from operations (FFO) to total debt ranged from 14%-16% during 2013-2015, and increased to 19% (annualized with trailing 12 months) in the first six months of 2016. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio was 6-8 times during the past five years. Over the next three years, TRIS Rating forecasts LH’s FFO to total debt ratio will stay around 15%, while the EBITDA interest coverage ratio will stay above 5 times.

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