TRIS Rating affirms the company rating on Quality Houses PLC (QH) and the ratings on QH?s existing senior unsecured debentures at ?A-?, with a ?negative? rating outlook. At the same time, we assign the rating of ?A-? to QH?s proposed issue of up to THB2 billion senior unsecured debentures due within three years. The company plans to use the proceeds from the new debentures to refinance some of the debentures coming due in November 2022.
The ratings reflect QH?s deteriorating performance and weakened market position in the landed property segment. The ratings continue to reflect its diversified product portfolio, reliable dividend income from its investments in affiliates, and its prudent financial management. The ratings also incorporate our concerns over the relatively high household debt level and rising inflation which could impact the purchasing power of homebuyers in the short- to medium-term while pushing up development and funding costs for developers.
QH?s operating revenues during the first nine months of 2022 were THB6.7 billion, rose 17% year-on-year (y-o-y) and in line with our forecast. Growth in revenues was supported by growth in residential property sales and recovery in the hospitality business. The company?s profitability exceeded our expectation thanks to the improving gross profit margin from residential sales and higher profit sharing from affiliates. As a result, its earnings before interest, taxes, depreciation, and amortization (EBITDA) during the first nine months of 2022 stood at THB2.5 billion, accounting for 90% of our full-year target.
As of September 2022, QH had 70 projects, comprising 56 landed property projects and 14 condominium projects. The total unsold value of these projects was THB40.2 billion (including built and unbuilt units). Landed property projects accounted for 71% of the total remaining value, while the rest comprised ready-to-transfer condominium projects. Its backlog was THB1.1 billion.
We expect QH to maintain its prudent financial policy. As the company plans to launch only landed property projects, we forecast its debt to capitalization ratio to stay below 35% over the next three years. As of September 2022, the ratio was 29%. QH had THB12.9 billion debts, comprising THB9.5 billion debentures and THB3.4 billion long-term loans. Around THB1.9 billion of its total debts were considered priority debts translating to a priority debt to total debt ratio of 15%.
We assess QH to have adequate liquidity over the next 12 months. At the end of September 2022, its sources of liquidity included cash on hand of THB2.9 billion and available short-term credit facilities of around THB4.2 billion. QH?s funds from operations (FFO) is expected to be around THB2 billion per annum. The company also has unencumbered land at book value worth THB5.4 billion, which can be pledged as collateral for new credit facilities. The company had debts of THB6 billion coming due in the next 12 months, comprising THB4 billion maturing debentures and THB2 billion term loan repayments.
The financial covenant on QH?s debt obligations requires QH to keep the net interest-bearing debt to equity ratio (net IBD/E) below 2 times. The ratio at the end of September 2022 was only 0.4 times. Thus, the company should comfortably comply with the financial covenant over the next 12 months.
RATING OUTLOOK
The ?negative? outlook reflects a slower-than-expected recovery in QH?s revenue and earnings and its weakened market position in the landed property segment. Amid economic headwinds, QH?s operating performance could further decline from the current level.
RATING SENSITIVITIES
We could revise QH?s outlook to ?stable? if its operating performance improves such that its revenue and EBITDA stay above THB10 billion and THB3 billion respectively on a sustained basis. At the same time, its financial profile should not further deteriorate from the current level. In contrast, a rating downward revision could occur if QH?s operating performance and/or financial profile significantly deteriorate from our base-case expectation causing the debt to capitalization ratio to rise above 50% and the debt to EBITDA ratio to exceed 5 times on a sustained basis.
RELATED CRITERIA
- Corporate Rating Methodology , 15 July 2022
- Key Financial Ratios and Adjustments for Corporate Issuers, 11 January 2022
- Issue Rating Criteria, 15 June 2021
Quality Houses PLC (QH)
Company Rating: A-
QH22NA: THB4,000 million senior unsecured debentures due 2022 A- QH243A: THB3,000 million senior unsecured debentures due 2024 A- QH246A: THB1,500 million senior unsecured debentures due 2024 A- QH255A: THB1,000 million senior unsecured debentures due 2025 A- Up to THB2,000 million senior unsecured debentures due within 3 years A- Rating Outlook: Negative TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: +66 0 2 098 3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2022, 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 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, without the prior written permission of TRIS Rating Co., Ltd. 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 www.trisrating.com/rating-information/rating-criteria