TRIS Rating has affirmed the company rating of Land & Houses PLC (LH) and the ratings of its existing senior debentures at “A” with “negative” outlook. The ratings reflect LH’s well-recognized brand, long track records and leading position in the residential property development market. However, these factors are partially offset by a slowdown and the cyclical nature of the property development industry as well as continuously weakening cash flow protection and profitability. The ratings also take into consideration the financial flexibility and a degree of synergies from its strategic investments in associated companies, which has helped the company become the leader and the most integrated developer in the residential property industry.
The “negative” outlook reflects the deterioration in LH’s sales performance and cash flow protection. The company’s ratings may be revised down if operating performance and cash flow protection do not demonstrate a sign of improvement from the current level. An aggressive dividend policy leading to lower a debt-service cushion could also have a negative rating impact. The outlook may be revised to “stable” if the company can maintain its strong leading position in the residential property market, record satisfactory sales performance, and improve operating profit margins to strengthen its cash flow protection.
TRIS Rating reported that LH was established in 1983 by the Asavabhokhin family and has long been Thailand’s leading residential property developer. As of April 2009, the Asavabhokhin family held 32% of the company’s shares, followed by the Government of Singapore Investment Corporation (GIC) (16.5%). Residential sales remained the major source of revenue, accounting for 98% of operating income in 2008 with rentals and services from recurring assets contributing the rest. LH’s core products are single detached houses (SDHs), which contributed approximately 84% of total operating income, while townhouses and condominiums together generated around 13%. LH’s competitive edge stems from its lengthy and extensive experience in delivering quality housing projects to customers. Investments in key strategic related businesses, which have been listed on two stock exchanges, not only provide a varied source of revenue from equity income and dividend proceeds, but also have helped LH become the most integrated residential developers. As of March 2009, LH had nearly 50 residential projects worth around Bt30,000 million in the remaining values, of which more than 90% was from SDH projects.
TRIS Rating said, LH sales performance in 2008 was below expectations -- decreasing to Bt15,770 million from Bt18,701 million in 2007. In the first quarter of 2009, sales continued to drop by 19% to Bt3,050 million because of a slowdown in demand. Benefiting from the government tax incentives, operating profit margins increased to 23.3% in 2008 from 18.5% in 2007 and to 20.8% in the first quarter of 2009 from 17.5% in the same period of 2008. Despite better profitability from the government tax incentives, cash flow protection remained on a declining trend. Funds from operations (FFO) to total debt decreased to 20.4% in 2008 and to 3.2% (non-annualized) in the first three months of 2009 from 23.3% in 2007. While earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio declined to 7.04 times in 2008 and 4.78 times in the first three months of 2009 from 7.33 times in 2007. Though the company’s capital base increased by Bt2,720 million from warrants exercised in 2008, outstanding debt increased to around Bt16,140 million by the end of March 2009 from Bt13,871 million in 2007. Debt to capitalization has remained at around 35%-37% since 2007 to the first quarter of 2009. To optimize its capital structure, the company has maintained an aggressive dividend policy, paying out 100% of net profits for the past three consecutive years. Despite the huge dividend payout, the pretax return on permanent capital (ROPC) has remained relatively lower than in the past many years. ROPC, which used to be high at around 17%-20% in 2004-2005, has dropped to around 10%-11% since 2006.
Though LH’s financial ratios have been deteriorated, the financial flexibility from its investments in associated companies remain a cushion. LH has invested in six key associates, five of which are listed on two stock exchanges (the Stock Exchange of Thailand, SET, and the Philippines Stock Exchange, PSE) and four of which are strategic tools in the property business. As of March 2009, investments in associates were worth around Bt10,000 million, accounting for nearly a quarter of LH’s total assets. Income from equity profit sharing was around Bt1,000 million per year over the past many years, while dividend receipts vary year by year with proceeds nearly half of the equity income.
TRIS Rating said, the residential property market was volatile over the past year, reflecting the national political instability and global financial crisis. Despite the government tax incentives, which allow a new house transaction of up to Bt300,000 to be deducted from personal income tax, the residential property market in Greater Bangkok is expected to track the overall economy, and will remain sluggish in 2009. To maintain credit quality, developers must prudently manage liquidity and preserve sufficient financial flexibility to meet obligations during a slowing economy. -- End