TRIS Rating Assigns Company Rating of “BBB-/Stable” to “Syntec”

TRIS Rating Co., Ltd. has assigned the rating of “BBB-” with “stable” outlook to Syntec Construction PLC (Syntec). The rating reflects Syntec’s position as one of market leader in high-rise building construction, effective cost control, and strong balance sheet. These strengths are partially offset by the cyclical nature of the engineering and construction (E&C) industry, intense competition, relatively low business diversity, and vulnerability of earnings to rising raw materials prices since most of its projects are under fixed-price contracts.

The “stable” outlook reflects the expectation that Syntec will be able to maintain its competitive position in private construction. Although competition will be heightened due to lower construction demand, the company is expected to preserve its bidding discipline and manage costs effectively in order to keep profitability at an acceptable level.

TRIS Rating reported that Syntec was established in 1988 as a medium-sized general construction company in Thailand specializing in high-rise building construction. The company’s total revenue in 2008 was Bt5,856 million. Most of its clients are in the private sector, covering residential property, hotel, and health care businesses. Though profitability in the private construction sector is usually higher than in the public sector, the company is highly exposed to declining construction demand during the economic downturn. Same as other E&C companies in Thailand, Syntec is exposed to volatility of raw materials prices since most of its contracts are fixed-price contracts. The company tries to mitigate this risk by locking in raw materials prices whenever possible and reducing unnecessary waste. The company monitors construction progress every week to help reduce the likelihood of a huge unexpected loss at the end of each project. Since most of its clients are in the private sector, Syntec is exposed to customer credit risk. The ability to screen and maintain good-credit-quality customers is one of its key success factors. During the past few years, Syntec has built up a reputation for construction quality and reliability, leading to several repeat customers such as Supalai PLC, Sansiri PLC, and the Bangkok Hospital Group. As of December 2008, the company had 27 projects on hand. The backlog stood at Bt6,180 million, down slightly from Bt6,512 million at the end of 2007. The current backlog was equivalent to 1.2 times the 2008 revenue (company only).

After exiting the business rehabilitation in 2003, Syntec’s operating performance started to improve due to strong demand for condominium and hotel construction. Revenue grew from Bt3,360 million in 2006 to Bt5,370 million in 2007 and Bt5,856 million in 2008. However, the adjusted operating margin dropped from 6.88% in 2006 to 6.25% in 2007 and 4.95% in 2008. The declines in the profit margin were due to increasing raw material prices in the first nine months of 2008. After recapitalizing in December 2003, Syntec’s capital structure is rather strong. As of December 2008, total debt was Bt894 million. The total debt to capitalization ratio was 34.14% and the funds from operations (FFO) to total debt ratio was 26.77%. Although TRIS Rating expects revenue and margin to fall in the intermediate term due to potentially weak demand, increasing competition and intensifying price competition, cash flow protection may not significantly weaken. Any fall in cash flow from operation should be offset by lower leverage as most of the debt was used to finance working capital. -- End

Company Rating: BBB- Rating Outlook: Stable Copyright 2009, 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.

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