TRIS Rating Co., Ltd. has downgraded the company and issue ratings of CH. Karnchang PLC (CK) to “BBB” from “BBB+” with “stable” outlook revised from “negative”. The downgrade reflects CK’s weakened financial profile as a result of high leverage and a decrease in profitability ratios. The ratings continue to reflect strengths in terms of the company’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in undertaking government infrastructure and specialized projects, and recurring income from concession investments. These strengths are partially offset by high financial leverage due to concession investments, backlog concentration, the inherent risk of fixed- price contracts, and the cyclical nature of the E&C industry.
The “stable” outlook reflects the expectation of a gradual improvement in CK’s operating margins and financial leverage over the medium term. The ratings could be improved should the company succeed in building a backlog that proves to enhance medium-term cash flows. In addition, a rating improvement requires a decrease in financial leverage and a demonstrated ability to sustain such improved capital structure over the medium term. TRIS Rating reported that CK is one of the top three construction companies in Thailand. The company’s construction experience encompasses a broad array of construction activities, ranging from general civil work to highly sophisticated projects. A strong relationship with several leading foreign contractors also enhances its bidding competitiveness and construction techniques. At the end of October 2010, CK’s project backlog was Bt12,465 million, of which 71% was the Purple Line train project. The company expects its backlog to increase markedly in 2011 from a number of projects waiting to be signed. These projects include the Xayaburi dam in Lao PDR (Bt76,000 million), two Blue Line train contracts (Bt15,028 million), a small power plant (Bt4,800 million), and a tobacco plant (Bt4,500 million).
TRIS Rating said, CK’s major asset investments include expressways, an underground mass transit, a water utility, and an electricity generation plant. As of September 2010, the company held a 16.4% stake in Bangkok Expressway PLC (BECL), a 24.6% holding in Bangkok Metro PLC (BMCL), a 30.0% stake in Thai Tap Water Supply PLC (TTW), and a 38.0% share of South East Asia Energy Co., Ltd. (SEAN). Recurring dividend income from BECL and TTW, at Bt500-Bt600 million per annum, helps reduce the effects of the cyclical construction industry. The Nam Ngum 2 project in Lao PDR undertaken by SEAN is going to generate revenue in 2011. BMCL’s unprofitable results and need for shareholders’ support continue to weigh on CK’s credit profile.
CK’s financial profile in 2010 weakened considerably as the margin for the Nam Ngum 2 project was revised down. CK recognized additional project costs of Bt1,070 million in the first quarter of 2010. TRIS Rating expects CK’s funds from operations (FFO) to improve in the coming years as its bottom line will be driven more by projects secured after 2009 when competitive pressures and material prices were more normal than in 2008. The leverage level remains high from the debt-funded concession investments. Expected cash outflows for equity investments and capital expenditures should continue to limit the company’s efforts over the medium term to bring its leverage level down. At the end of September 2010, the net debt to equity ratio stood at 2.3 times, leaving modest room since financial covenants call for the ratio not to exceed 2.5 times.
CK’s financial flexibility is meaningfully enhanced by an investment portfolio of sound marketable securities. At the end of September 2010, the market value of CK’s investment portfolio was Bt13,925 million, assuming the value of SEAN at cost. The investment market value is expected to be higher should it reflect SEAN’s fair value. TRIS Rating expects the company to continue exploring alternatives to support its debt reduction efforts and future investments. -- End
Company Rating: Downgraded to BBB from BBB+ Issue Ratings: CK114A: Bt2,000 million senior debentures due 2011 Downgraded to BBB from BBB+ CK11OA: Bt1,000 million senior debentures due 2011 Downgraded to BBB from BBB+ CK122A: Bt1,616.2 million senior debentures due 2012 Downgraded to BBB from BBB+ CK126A: Bt1,400 million senior debentures due 2012 Downgraded to BBB from BBB+ CK13OA: Bt2,000 million senior debentures due 2013 Downgraded to BBB from BBB+ CK142A: Bt883.8 million senior debentures due 2014 Downgraded to BBB from BBB+ CK143A: Bt1,100 million senior debentures due 2014 Downgraded to BBB from BBB+ Rating Outlook: Stable from Negative
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