TRIS Rating Co., Ltd. has affirmed the company rating of Land & Houses PLC (LH) and the ratings of its existing senior debentures at “A”. At the same time, TRIS Rating has assigned the rating of “A” to LH’s proposed issue of up to Bt2,500 million in senior debentures. The outlook remains “stable”. The proceeds from the new debentures will be used mainly to replace maturing bonds in September 2011. The ratings reflect LH’s leading position in the residential property development market, a strong brand franchise, and a proven management competency. The ratings also take into consideration the financial flexibility from strategic investments in associated companies. However, these factors are partially offset by the cyclical nature of the property development industry and a high financial leverage in the medium term.
The “stable” outlook reflects an expectation that LH will sustain its market competitiveness, growth momentum, and cash flow protections at acceptable levels. However, should LH’s debt to capitalization ratio rise to stay above 50% for a sustained period, this will likely lead to a downward pressure on the company’s ratings.
TRIS Rating reported that LH is one of Thailand’s leading residential property developers. The company was established in 1983 by the Asavabhokhin family. As of July 2011, the Asavabhokhin family
held 31% of the company’s shares, followed by the Government of Singapore Investment Corporation (GIC) at 16%. LH’s core products are single detached houses (SDH), which contribute around two-thirds of total revenue. LH owns a very strong residential brand franchise with premium market perceptions in terms of product quality and after-sale services. A large portfolio of SDH brands under various price ranges allows the company to customize its housing products to suit buyer affordability and characteristics for each location. LH’s market strength is underscored by the company’s respectable presales growth momentum. Since 2007, the company’s presales have grown by an average of 5.1% per annum with a strong pent-up demand growth during 2009-2010, helping to offset declining presales in 2008.
In 2010, LH introduced three new brands to capture market shares for products priced under Bt3 million per unit. In TRIS Rating’s view, LH will need time to strongly establish its market presence in this segment. Nonetheless, in the short run, LH’s new venture should generate a respectable performance and help complement the company’s growth profile to be more in line with the industry.
TRIS Rating said, as market growth in the low-rise segment began to rebound in 2011, TRIS Rating expects LH’s revenue to start showing a moderate growth. Contribution from condominium revenue will be more evident from 2012. At the end of March 2011, condominium backlog was Bt3.9 billion. Although LH’s current high-rise backlog level is not so high compared with expected revenue recognition, TRIS Rating takes certain comfort from the company’s historical records of success in condominium projects.
LH’s operating income before depreciation and amortization as a percentage of revenue was 18.9% in the first quarter of 2011. TRIS Rating expects the company’s operating margins to stay around 18%-19% in the medium term with a modest pressure from higher marketing expenses for the “Terminal 21” project. The company’s ratio of total debt to capitalization at the end of March 2011 stood at 45.3%. LH’s leverage level is expected to stay elevated over the next few years taking into consideration the construction cost for the Terminal 21 project, inventory build-up, and aggressive dividend policy. LH’s debentures covenant limits the company’s debt to equity ratio at 1.25 times. At the end of March 2011, the ratio stood at 0.83 times.
TRIS Rating said about LH’s liquidity profile that it has weakened since 2010 due to a rise in the debt level, but remains acceptable. The company’s financial flexibility is enhanced by a significant holding of investments in associated firms worth approximately Bt25.4 billion. The company generates funds from operations (FFO) of Bt2.9 billion in 2010, of which 21% was dividends from associates. LH’s FFO is expected to improve appreciably from 2012 after revenue from condominiums become more significant.
Demand for housing depends mostly on consumer confidence and the economic environment. The government usually provides supports for this industry during an economic downturn. Due to the government tax incentives scheme offered during 2008-2010 and the faster-than-expected economic recovery, demand for residential property has improved significantly since the second half of 2009. The
momentum had sustained throughout 2010. Several developers had stepped up land acquisitions since
late 2009, pushing up the industry-wide leverage level significantly in 2010. The changes in the loan-to-value policy (LTV ratio) implemented by the Bank of Thailand (BOT) in 2011 and rising interest rates are expected to curb speculative demand in the condominium segment and reduce affordability of housing for the low-income segment. Therefore, the growth rate of this industry is expected to be lower this year compared with the previous year. Large developers are expected to gain more market share at the expense of smaller developers. Several major developers have diversified by entering the low-priced housing segment. This move will cause competition in this segment to be more intense than before, said TRIS Rating. -- End
Company Rating: Affirmed at A Issue Ratings: LH119A: Bt2,000 million senior debentures due 2011 Affirmed at A LH127A: Bt3,000 million senior debentures due 2012 Affirmed at A Up to Bt2,500 million senior debentures due within 2014 A Rating Outlook: Stable
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