TRIS Rating Co., Ltd. has downgraded the company and current issue ratings of Italian-Thai Development PLC (ITD) to “BBB” from “BBB+”. At the same time, TRIS Rating has assigned the rating of “BBB” to ITD’s proposed issue of up to Bt3,500 million in senior debentures. The outlook has been revised to “stable” from “negative”. The proceeds from the proposed debentures will be reserved to redeem ITD’s convertible debentures in case the debenture holders decide to exercise their put option on 10 June 2011. The downgrade was the result of ITD’s operating performance that is weaker than expectation and will remain under pressure due to the high predevelopment costs on several mega projects that ITD pursues. The downgrade also reflects the company’s relatively high leverage due mainly to its aggressive investment outlays over the past several years. Leverage has remained high despite ITD’s attempts to reduce its debt by selling its investments and assets in 2010.
The “BBB” ratings reflect ITD’s leading market position in Thailand, strong and diverse project backlog, broad product line, geographic diversity, vertical integration, and proven records in undertaking both government infrastructure projects and specialized projects. However, these strengths are partially offset by the inherent risk of fixed unit price contracts, the cyclical nature of the construction industry, high financial leverage and aggressive investment policy.
The “stable” outlook reflects the expectation that ITD’s cash flow from operations will gradually increase, backed by a strong backlog and better margins from new coming infrastructure projects. However, the ratings or outlook could be lowered if the company’s financial profile deteriorates significantly from its current level and leads to a concern over its liquidity position. The ratings could be improved if ITD is able to generate substantial free cash flow to gradually reduce debt, thus improving in cash flow protection on a sustainable basis.
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, 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 2010 was Bt36,076 million. 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 because of the unfamiliar business environments. Apart from geographic diversification, ITD has also diversified into the construction materials business such as steel, concrete fabrications and cement. While vertical integration enhances ITD’s cost competitiveness by strengthening its bargaining power with suppliers and mitigating the risk of raw material shortages, it does not mitigate the cyclical risk of the construction business. In addition, investments in capital intensive businesses such as cement production weakened ITD’s financial profile because the leverage rose on the company’s consolidated balance sheet.
TRIS Rating said that ITD secured new orders worth Bt77,106 million for the first four months of 2011, compared with only Bt16,085 in 2010. As of 26 April 2011, the group’s backlog (including Bt36,951 million in awarded projects awaiting contracts to be signed) surged to Bt200,526 million, representing 5.56 times the level of revenue in 2010. Around 68% of the group backlog was from overseas projects mainly in India and Bangladesh. TRIS Rating expects ITD’s backlog will remain strong in the medium term based on the potential increase in public infrastructure projects and several construction works on its concession projects. Currently, ITD was granted four concession projects: a deep seaport and industrial estate plus a thermal power plant in Myanmar, a toll road in Bangladesh, and a bauxite mining in Lao PDR. ITD will establish concession companies to operate each concession business. ITD plans to hold a
30%-40% equity interest in each concession company and will also undertake the project construction assignments.
ITD’s financial profile in 2010 was weaker than TRIS Rating’s expectation. Without a gain on sale of investments and assets worth Bt2,067 million in 2010, ITD would have reported a net loss of Bt1,769 million. The lower turnover coupled with its relatively high operating leverage and predevelopment costs on its concession projects resulted in contracted margin. Operating margin before depreciation expense dropped to 4.88% in 2010, compared with 5.55% in 2009. Funds from operations (FFO) in 2010 dropped by 78% year-on- year (y-o-y) to Bt295 million. Both the FFO to total debt ratio and the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio weakened to 1.28% and 1.21 times, respectively. However, TRIS Rating expects that ITD’s strong backlog as well as the potential increase in the number of public infrastructure projects will help improve its revenue growth in the short to medium term. However, FFO will remain constrained unless ITD is able to reduce high administrative expenses and financing costs. TRIS Rating also expects that ITD’s financial leverage will remain high in the intermediate term. The company will need more working capital as construction activity rebounds. In addition, ITD’s plans for equity investments in concession projects and capital expenditures could derail its efforts to reduce debt. As of December 2010, the debt to capitalization ratio stood at 66.47%, down slightly from 68.5% in 2009. -- End
Company Rating: Downgraded to BBB from BBB+ Issue Ratings: ITD139A: Bt1,500 million senior debentures due 2013 Downgraded to BBB from BBB+ ITD146A: Bt5,000 million senior debentures due 2014 Downgraded to BBB from BBB+ ITD159A: Bt1,000 million senior debentures due 2015 Downgraded to BBB from BBB+ Up to Bt3,500 million senior debentures due within 2016 BBB Rating Outlook: Stable from Negative TRIS Rating Co., Ltd./www.trisrating.com Contact: rapee@tris.co.th, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2011, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.