TRIS Rating Co., Ltd. has affirmed the company rating of Syntec Construction PLC (Syntec) at “BBB-” with “stable” outlook. The rating reflects the company’s position as a market leader 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 its core competency of effective cost control and a strong balance sheet.
TRIS rating reported that Syntec was established in 1988 and now is a medium-sized general contractor, specializing in high-rise building construction. Most of Syntec’s clients are in the private sector, covering a range of industries such as residential and retail property development, hotel, and manufacturing. Profitability in the private construction sector is usually higher than in the public sector. However, private sector projects are more sensitive to economic conditions. Thus, the company is more exposed to a decline in construction demand during an economic downturn. Syntec is also 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 a reputation for construction quality and reliability, leading to several repeat customers such as Supalai PLC, Major Development PLC, and the Bangkok Hospital Group. 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. The company tries to mitigate this risk by locking 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. As of December 2010, the company had 29 projects on hand. The backlog stood at Bt5,791 million, up 17% from Bt4,956 million at the end of 2009. The current backlog was equivalent to 1.2 times its revenue in 2010.
TRIS Rating said, Syntec’s operating performance in 2010 was weaker than expected. Construction revenue declined by 19% year-on-year (y-o-y) to Bt5,003 million. Revenue fell because Syntec received very few new orders in the first half of 2009. The gross margin dropped to 6.06% compared with 11.2% in 2009. The drop was mainly due to cost overruns in some projects and higher administrative costs from project delays as a result of political unrest in April and May 2010. In addition, losses on the Baan Aue-Arthorn projects were larger than previously estimated. Because of these difficulties, net profit dropped to Bt203 million in 2010. Nonetheless, Syntec’s solid operating cash flow over the past few years has helped the company maintain a strong balance sheet and adequate cash balances. As of December 2010, total debt was Bt684 million, down from Bt762 million in 2009. The cash balance stood at Bt556 million in December 2010, or 81% of outstanding debts. The total debt to capitalization ratio improved from 32.29% in 2008 to 22.73% as of December 2010. Although the funds from operations (FFO) to total debt ratio weakened to 15.26%, the drop is expected to be temporary and the ratio should recover to its historical level of more than 30% next year. - End
Company Rating: Affirmed at BBB- Rating Outlook: Stable
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