TRIS Rating Upgrades Company Rating of “STEC”to “BBB” from “BBB-” with “Stable” Outlook

TRIS Rating Co., Ltd. has upgraded the company rating of Sino-Thai Engineering & Construction PLC (STEC) to “BBB” from “BBB-” with “stable” outlook. The upgrade reflects the continued improvement in STEC’s financial profile and the commitment of management to maintain a conservative approach when taking new orders. The rating also takes into consideration the company’s market position as one of Thailand’s top three construction contractors, specialization in mechanical and electrical (M&E) services for power and petrochemical plants, lengthy track records in both the private and public sectors, and readiness to reap the benefits from government infrastructure investments designed to boost the economy. However, these strengths are partially offset by the risks of cost overruns, in particular for long duration fixed-unit-price contracts, continued pressure on construction margins, a high and concentrated backlog, and exposure to the volatile and cyclical engineering and construction (E&C) business.

The “stable” outlook reflects TRIS Rating’s expectation that STEC will maintain a strong balance sheet and financial profile during the difficult market environment. In addition, the company is expected to employ disciplined bidding in order to maintain profit margins at an acceptable level.

TRIS Rating reported that STEC is a leading construction contractor in Thailand, with a strong market position in both private and public works construction. The company is ranked as a class 1 licensed contractor for almost all government authorities and state enterprises. Although the industry is fragmented, STEC benefits from the high barriers to entry, as one of the few prequalified contractors who are able to bid for large public projects. Based on its proven track record and strong support from financial institutions, STEC has a better chance to win bids for several mega projects under the government economic stimulus package. However, a major concern remains since political instability might hinder the implementation of these projects. In addition to infrastructure construction, STEC is known for its specialization in M&E services for power plants and petrochemical plants, piping and steel structure fabrication & erection works. The ratio of revenue from three divisions (infrastructure: building: energy) in 2008 was 47:24:11. Approximately 75% of construction revenue in 2008 was generated from public projects. As of July 2009, the backlog was valued at Bt7,975 million, down 34% from Bt12,100 million as of December 2008. However, if awarded projects not yet signed are included in the backlog, the total backlog will increase to Bt23,860 million.

TRIS Rating said, STEC’s operating performance gradually improved from a massive loss in 2006. The operating margin improved from -8.81% in 2006 to 5.29% in the first six months of 2009. TRIS Rating believes that the operating margin in the second half of 2009 will further improve as unprofitable projects are nearly complete. In addition, high margin projects such as steel structural work will be major revenue contributors in the second half of 2009. Nonetheless, the operating margin is expected to be volatile as all projects in the backlog are under fixed-unit-price contracts. Cost overruns due to higher raw materials prices, project delays or other unexpected events will be borne by the contractor. However, based on the liquidity profile, STEC can partially mitigate raw material price risk by locking in some key construction material prices in advance if necessary.

Although operating performance has been volatile during the past few years, the capital structure remained strong. STEC kept leverage low by using supplier credits and advance payments received from clients. As of June 2009, total debt was Bt387 million, a significant drop from Bt1,757 million in the same period of the prior year. With better operating performance and less debt, the total debt to capitalization ratio strengthened to 8.04%. The earnings before interest, tax, depreciation and amortization interest coverage ratio during the first six months of 2009 rose to 17.04 times, from 7.52 times in 2008. The funds from operations to total debt ratio also improved significantly, rising from 39.71% in 2008 to 68.31% (non-annualized) in the first six months of 2009, said TRIS Rating. — End

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