TRIS Rating Co., Ltd. has affirmed the company and senior debenture ratings of CH. Karnchang PLC (CK) at “BBB” with “stable” outlook. The ratings reflect CK’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in infrastructure and specialized projects, as well as financial flexibility from strategic investments. These strengths are partially offset by the cyclical nature of the E&C industry, the inherent risk of fixed-price contracts, and the company’s high financial leverage. The “stable” outlook reflects the expectation of an improvement in CK’s operating margins by 2012. A rating improvement requires a decrease in financial leverage and a demonstrated ability to sustain such improved capital structure over the medium term. On the contrary, if CK continue to invest in the Xayaburi project in the absence of comparable compensations to reduce unbilled receivables, or net debt to equity ratio exceeding 2.5 times, the company’s credit profile will be negatively impacted.
TRIS Rating reported that CK was established in 1972 by the Trivisvavet family. The company is one of the top three SET-listed E&C companies. CK’s construction experience ranges from general civil work to highly sophisticated projects. A strong relationship with several leading foreign contractors also enhances its bidding competitiveness and construction technology. CK has holding stakes in three SET-listed companies: Bangkok Expressway PLC (BECL), Bangkok Metro PLC (BMCL), and Thai Tap Water Supply PLC (TTW). In addition, the company invests in several electricity companies with strong revenue generations underpinned by selling contracts with government entities. Recurring dividend income from BECL and TTW, about Bt550 million per annum, helps reduce the effects of the cyclical construction industry. However, financial assistance to BMCL and on-going investments continue to weigh on CK’s credit profile.
TRIS Rating said, CK’s backlog quality has continued to improve. At the end of September 2011, CK’s project backlog stood at Bt30,809 million. In December 2011, CK signed the green-line electric train contract (Baring-Samutprakan) worth Bt14 billion. The backlog diversity has also improved with the largest contract accounting for 29% of total backlog. The backlog is expected to increase markedly should the company secure the Xayaburi project in Lao PDR worth Bt76 billion.
CK’s strong backlog, as well as expected projects in the pipeline, has underpinned the company’s medium-term revenue prospects. CK’s revenue should range between Bt15-Bt18 billion per annum during 2012-2014. CK’s operating margins before depreciation and amortization has turned negative since 2010 due to continuing cost revisions. CK believes its margins will start to improve from 2012 as revenue will be largely driven by the electric train projects in which the company has already locked in key material prices. TRIS Rating expects CK’s operating margin before depreciation and amortization to improve to above 5% from 2012 onwards.
CK’s financial leverage is high. At the end of September 2011, the debt to capitalization ratio was 76.8%. The highly levered capital structure was primarily attributable to the debt funding for strategic investments and loans to BMCL. In TRIS Rating’s view, CK’s on-going investments will likely constrain the company’s ability to bring down its debt to capitalization below 70% within the next few years.
CK’s liquidity ratios are weak. However, the ratings consider CK’s financial flexibility through its large holding of shares in SET-listed companies. At the end of September 2011, the fair value of CK’s investments in listed companies was Bt9.7 billion, about 45% of the company’s total debts of Bt23 billion. Cash on hand was at Bt5.6 billion. Debts mature over the next 12 months are around Bt5 billion. TRIS Rating is monitoring on CK’s working capital which has tightened after the company has spent Bt4 billion on the Xayaburi project with disproportionate cash receipts. This resulted in CK’s unbilled receivables to rise from Bt3.8 billion in 2009 to Bt7.9 billion at the end of September 2011, said TRIS Rating. — End
Company Rating: Affirmed at BBB Issue Ratings: CK122A: Bt1,616.2 million senior debentures due 2012 Affirmed at BBB CK126A: Bt1,400 million senior debentures due 2012 Affirmed at BBB CK13OA: Bt2,000 million senior debentures due 2013 Affirmed at BBB CK142A: Bt883.8 million senior debentures due 2014 Affirmed at BBB CK143A: Bt1,100 million senior debentures due 2014 Affirmed at BBB CK154A: Bt2,000 million senior debentures due 2015 Affirmed at BBB CK167A: Bt2,000 million senior debentures due 2016 Affirmed at BBB CK187A: Bt1,000 million senior debentures due 2018 Affirmed at BBB Rating Outlook: Stable
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