TRIS Rating Co., Ltd. has affirmed the company rating of Hemaraj Land and Development PLC (Hemraj) at “A-” with “stable” outlook. The rating continues to reflect Hemraj’s proven record in industrial estate development and growing base of recurring income from utilities services. The rating also takes into consideration the rising level of leverage from various investments including the power generation business. The volatile nature of the industrial property market and political uncertainty remain rating concerns.
The “stable” outlook reflects the rising demand for industrial property as the economy grows. The increasing contribution from the utilities services and rental businesses are expected to provide more reliable cash flow streams for Hemraj to counterbalance the fluctuations in industrial land sales. In addition, TRIS Rating expects the company to maintain the debt to capitalization ratio below its stated policy of 50% when pursuing its growth strategy.
TRIS Rating reported that Hemraj is one of the leading industrial estate developers in Thailand. It was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1992. As of March 2011, the Horrungruang family held 15.0% of the total number of Hemraj’s total shares. In addition to industrial land and utilities sales, the company also developed a luxury condominium project in central Bangkok. Over the past three years, property sales accounted for 60%-70% of the company’s total revenue except in 2009 when industrial land sales were hard hit by the global economic slump. Recurring income, which came mainly from utilities and rental income, made up the remainder or about 30%-40% of total revenue.
TRIS Rating said, Hemraj owns and operates six industrial estates located in Rayong, Chonburi, and Saraburi provinces with a total gross area of 31,350 rai. Among 435 existing customers as of March 2011, 35% were in the automotive industry and 12% were in the petrochemical industry. Approximately 40% of the remaining salable area of 8,153 rai, as of March 2011, was located in Hemaraj Eastern Seaboard Industrial Estate (H-ESIE). The major customers in this estate are in the automotive industry.
After being severely affected by the global economic recession in 2009, Hemraj’s operating performance recovered notably in 2010. Hemraj’s land sales jumped to 930 rai in 2010 compared with only 144 rai in 2009, thanks to the sales of a big plot to Ford, a key automotive manufacturer. The global economic recovery and less political tension also bolstered industrial land sales. According to CB Richard Ellis’s report, total industrial land sales in Thailand rose to 3,622 rai in 2010 from 901 rai in 2009. Hemraj’s recurring income from utilities and rental income also increased in 2010, rising by 4% over 2009 to Bt1,433 million. Total revenue in 2010 rose to Bt3,685 million, a jump of 80% over 2009. Earnings before interest, tax, depreciation and amortization (EBITDA) also climbed up by 91% to Bt1,654 million in 2010. In the first quarter of 2011, Hemraj’s land sales remained encouraging at 312 rai. However, a change in accounting policy regarding the revenue recognition method depressed the total revenue of Hemraj in the first quarter of 2011. The Federation of Accounting Professionals has changed the revenue recognition for property developers to the title transfer method from the percentage of completion method since January 2011. Hemraj’s total revenue in the first quarter of 2011 dropped by 74% over the same period of last year (year-on-year -- y-o-y) to Bt566 million. The lower level of recognized revenue also slashed EBITDA in the first quarter; EBITDA fell by 81% y-o-y to Bt148 million. The accounting change will delay the booking of revenue but will have no impact on the company’s cash flow. The level of recognized revenue is expected to return to normal in the second half of 2011. Looking forward, the outlook for industrial land demand remains positive, given a 25% y-o-y increase to Bt207.5 billion in the value of projects applying for the Board of Investment’s (BOI) promotional privileges during the first five months of 2011 and anticipated economic growth. Although the earthquakes and tsunami in Japan occurring in March 2011 disrupted the supply chains and reduced manufacturing activities, especially in the automotive and electronic sectors, the impact is expected to be short-lived.
Hemraj’s recurring income has remained resilient and has increased gradually. Utilities income, which made up about 68% of total recurring income for 2010, was Bt968 million, up by 26% over 2009. In the first three months of 2011, utility income continued to rise, climbing to Bt286 million or a 32% increase over the same period of last year. The growth drivers were higher demand following economic recovery and revenue consolidation with Hemaraj Saraburi Industrial Land Co., Ltd. (HSIL) and Hemaraj Rayong
Industrial Land Co., Ltd. (HRIL). Hemraj has increased stake in HSIL and HRIL to 100% from 25% with investment of Bt1,144 million since the fourth quarter of 2010. The ready-built factories business continued to improve in 2010 and the first quarter of 2011. Rented area increased by 17,231 square meters (sq.m.) in 2010, a 19% y-o-y growth and a 10,291 sq.m. rise in the first quarter of 2010, or a 10% y-o-y increase.
TRIS Rating said, Hemraj’s level of leverage accelerated in 2010 and the first quarter of 2011. The total debt to capitalization rose notably to 46.1% as of March 2011 from 32.4% in 2009. Hemraj has issued debentures of three to nine years worth Bt6,000 million during 2010 and has a plan to issue additional debentures in 2011 to fund its planned investment during 2010-2011. Its Bt6,000 million capital expenditures for 2011 include an investment in GHECO-One Co., Ltd., the expansion of the industrial estate, the utilities, and Small Power Producer (SPP) businesses. Despite the rise in leverage, the repayment schedule is properly laid out. The scheduled loan repayments of approximately Bt500-Bt700 million per year during 2011-2012 can be accommodated by Hemraj’s funds from operations (FFO) of about Bt700-Bt900 million per year. As of March 2011, the company had cash on hand of Bt3,200 million and available credit facilities of about Bt2,000 million from financial institutions. The higher repayment scheduled in 2013 will be supported by cash from the dividends from GHECO-One, an independent power producer (IPP) project. GHECO-One, in which Hemraj has 35% stake, is expected to be in operation and provide a sizeable and reliable stream of dividends for the company from 2012 onward. -- End
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