TRIS Rating Affirms Company Rating of “Syntec” at “BBB-” with “Stable” Outlook

TRIS Rating Co., Ltd. has affirmed the company rating of Syntec Construction PLC (Syntec) at “BBB-” with “stable” outlook. The rating reflects the position of Syntec as one of market leaders 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, exposure to customer credit risk, and the 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 sustain its competitive position in the private construction segment. TRIS Rating also expects that the company will maintain bidding discipline and keep the balance sheet strong during the difficult market environment.

TRIS Rating reported that Syntec was established in 1988. The company is a medium-sized general construction company in Thailand specializing in high-rise building construction. Total revenue in the first nine months of 2009 was Bt4,504 million, up 1.3% year-on-year (y-o-y). Most of its clients are in the private sector, covering residential and retail property development, hotel, and industry. Although profitability in the private construction sector is usually higher than in the public sector, the company is highly exposed to decline in construction demand during an economic downturn. As with other E&C companies in Thailand, the company is exposed to the volatility of raw materials prices since most of its contracts are fixed-price contracts. Syntec tries to mitigate this risk by locking in raw materials prices whenever possible and reducing unnecessary waste. The company closely monitors construction progress which helps 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 customers with good credit quality 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 September 2009, the company had 33 projects on hand. The backlog stood at Bt6,089 million, down 10% from Bt6,764 million at the end of 2008. The current backlog was equivalent to 1.2 times the 2008 revenue (company only).

Syntec’s operating performance in the first nine months of 2009 was hampered mainly by losses on the Baan Ur-athorn project caused by higher construction material costs and delays in completing the work. The provision for construction losses and liquidated damage totaling Bt129 million were set aside in the first nine months of 2009. This dragged down the operating margin before depreciation and amortization expenses to 4.88% from 5.05% in 2008. Nonetheless, Syntec’s solid operating cash flow over the past few years has helped the company maintain cash balance and balance sheet at strong levels. As of September 2009, total debt was Bt713 million, down from Bt822 million in 2008, whereas the cash balance stood at Bt658 million. The total debt to capitalization ratio improved from 32.29% in 2008 to 26.04% as of September 2009. The funds from operations (FFO) to total debt ratio (non-annualized) was very high at 54.02%, said TRIS Rating. -- End

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