TRIS Rating Affirms Company and Issue Ratings of “ITD” at “BBB+” with “Negative” Outlook

TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Italian-Thai Development PLC (ITD) at “BBB+” with “negative” outlook. The ratings reflect ITD’s position as the largest general construction contractor in Thailand, its strong backlog, broad product line, geographic diversity, vertical integration, and the government policy to invest in infrastructure projects to boost economy. The ratings also take into consideration the potential of ITD to reduce its debt load by selling its investment in the Nam Theun II Hydroelectric dam. However, these strengths are partially offset by the risks of cost overruns, in particular for the long duration fixed-unit price contracts; continued pressure on construction margins; exposure to the volatile and cyclical engineering and construction (E&C) business; and its relatively high leverage.

The “negative” outlook is based on ITD’s high financial leverage and weak operating performance, despite an improvement over the past several quarters. The ratings would be downgraded if the company cannot strengthen its operating performance and reduce leverage as planned.

TRIS Rating reported that ITD is Thailand’s largest construction contractor. Its leading market position is supported by a strong track record, good relationships with both private and public sector clients, economies of scale, self-sufficiency in key raw materials, an extensive machinery and equipment fleet, and an adequate supply of skilled labor and engineers. ITD’s total revenue in the first nine months of 2009 was Bt30,385 million, almost triple the revenue of Thailand’s second largest construction contractor. The company operates nine business divisions, three foreign branches (in Taiwan, the Philippines and India), and four foreign subsidiaries (in Myanmar, India, Indonesia and Madagascar). Although the strategy to diversify the revenue base abroad helps maintain sales volume during slowdowns in the domestic construction industry, the strategy adds risk exposure from unfamiliar business environments. The group’s backlog as of 9 December 2009 was Bt97,242 million, including Bt1,516 million in awarded projects waiting to be signed. Around 61% of the backlog was from overseas projects mainly in India and Indonesia. Apart from geographic diversification, ITD also diversifies into the construction material businesses such as steel, concrete fabrication and cement. While vertical integration enhances ITD’s cost competitiveness by strengthening bargaining power with suppliers and mitigating the risk of raw material shortages, it does not mitigate the cyclical risk of the E&C business. In addition, investments in the capital intensive businesses such as cement production weakened ITD’s financial profile as the leverage rose on the consolidated balance sheet.

TRIS Rating said, although the industry is fragmented, a few major contractors benefit from the high barriers to entry. For example on large public projects, only prequalified contractors are able to bid. Therefore, the three largest contractors will have more chances to win the biddings for large public projects based on their proven track records and strong support from financial institutions. Transportation infrastructure projects and mining projects, for which ITD has the expertise and sufficient machinery on hand, should drive growth in the medium term. ITD also intends to bid on mega-projects to be launched both in Thailand and India.

For the first nine months of 2009, ITD reported net profit of Bt54 million due to gains on repurchase of debt worth Bt503 million. Operating performance improved compared with the same period of the prior year as there was no provision for construction losses and no margin pressure from rising material costs. Operating margin before depreciation and amortization expenses increased to 7.3%, compared with -0.26% year-on-year (y-o-y). However, operating profit was not sufficient to service the financing costs which rose to Bt1,525 million, up 28% y-o-y due to higher financial leverage. The company plans to reduce debt by divesting the Nam Theun 2 Power Co., Ltd. (NTPC) investment by the second quarter of 2010. As of September 2009, adjusted debt (including a loan commitment to a special purpose vehicle -- SPV) was Bt24,247 million, down from Bt25,118 million as of December 2008. The adjusted debt to capitalization ratio was relatively high at 64.5%. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio in the first nine months of 2009 strengthened to 2.02 times, up from 0.8 times in 2008. TRIS Rating expects that after completing the divestment, the debt to capitalization ratio of ITD should be lower than 60%. In addition, ITD’s profitability should improve in the medium term based on better mix of higher margin projects in the backlog and a reduction in interest expenses as a result of the improved capital structure. -- End

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