TRIS Rating affirms the company rating on Unique Engineering and Construction PLC (UNIQ) at ?BBB+? and the ratings on UNIQ?s existing senior unsecured debentures at ?BBB?. At the same time, TRIS Rating assigns the rating of ?BBB? to UNIQ?s newly proposed issue of up to THB2.5 billion senior unsecured debentures. The proceeds from the new debentures are intended for debt repayment and/or funding working capital. We maintain the ?negative? outlook to reflect our concerns as regards the significant deterioration in UNIQ?s performance and financial profile.
The ratings continue to reflect UNIQ?s competitive strengths and sound profitability. However, these strengths are weighed down by the company?s high business concentration of construction projects in backlog. The ratings also consider the fierce competition in the engineering and construction (E&C) industry and potential delays in the biddings of public construction projects, which impede the revival of UNIQ?s operating performance.
The issue ratings being one notch below the company rating reflects the subordination of the senior unsecured debentures to the priority debt. As of June 2021, UNIQ?s total debt, excluding financial leases, was THB16.2 billion. Of the total, THB10.2 billion was secured debt, or priority debt. In effect, the priority debt to total debt ratio was 63%, exceeding the 50% threshold, indicating that the unsecured creditors are significantly disadvantaged to the priority debt holders with respect to claims against the company?s assets, according to TRIS Rating?s ?Issue Rating Criteria?.
Fiercely competitive biddings and difficulties in construction management during the Coronavirus Disease 2019 (COVID-19) pandemic have put additional strain on UNIQ?s operating performance. For the first half of 2021, its total operating revenue was THB5.2 billion, a slight increase of 0.8% year-on-year (y-o-y). In contrast, the company?s earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled THB1.1 billion, an 11.2% y-o-y decrease. UNIQ?s debt surged to THB16.9 billion as of June 2021, as large sums of unbilled receivables and account receivables related to the double-track railways, the fourth contract of the Orange Line electric rail route, and the Red Line electric railway, resulted in a sharp rise in working capital needs. We maintain our forecast that UNIQ?s debt to EBITDA ratio could stay above 6 times in 2021. The ratio could decline to about 5 times in 2022-2023 as earnings recover.
RATING OUTLOOK
The ?negative? outlook reflects our expectation of a significant deterioration in UNIQ?s earnings and financial profile in 2021, before gradually improving in the following years as we expect the company will be able to secure new contracts. However, uncertainties from the prolonged pandemic, delays in public project biddings and intense competition remain the key risks.
RATING SENSITIVITIES
A rating downgrade could occur if UNIQ?s financial profile materially deteriorates below our expectations. This could be due to project delays, cost overruns, or inefficient working capital management, such that the company?s debt to EBITDA ratio remains above 5 times without clear sign of improvement. Lower-than-expected amounts of new contracts could also weigh significantly on the ratings. In contrast, the rating outlook could be revised to ?stable? if working capital management and profitability are in line with our expectations and UNIQ can secure new construction contracts as targeted.
RELATED CRITERIA
- Issue Rating Criteria, 15 June 2021
- Rating Methodology ? Corporate, 26 July 2019
- Key Financial Ratios and Adjustments, 5 September 2018
Unique Engineering and Construction PLC (UNIQ)
Company Rating: BBB+
Issue Ratings:
UNIQ222A: THB2,000 million senior unsecured debentures due 2022 BBB
UNIQ232A: THB3,000 million senior unsecured debentures due 2023 BBB
Up to THB2,500 million senior unsecured debentures due within 5 years BBB
Rating Outlook: Negative