TRIS Rating Co., Ltd. has affirmed the company rating of Land & Houses PLC (LH) and the rating 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 Bt4,000 million in senior debentures. TRIS Rating has also cancelled the rating of “A” previously assigned to the proposed issue of up to Bt2,500 million in senior debentures announced in July 2011 as LH decided not to issue bonds at that period. The outlook remains “stable”. LH will use the proceeds from the new debentures for refinancing the short-term debts and for business expansion. The ratings reflect the company’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, expected rise in material and labor costs, and a high financial leverage. The “stable” outlook reflects an expectation that LH will sustain its market competitiveness with product offerings that match market dynamism. The ratings will likely be downgraded should the company’s debt to capitalization ratio rise to stay above 50% for a sustained period.
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 year-end 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 three quarters of total revenue. LH owns a very strong residential brand equity 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 records, ranging between Bt16-Bt20 billion per annum over the past five years.
In the aftermath of the flood crisis, TRIS Rating believes that excess low-rise residential units in flooded areas, uncertain shifts in market behaviors, and flood-related costs pose challenges for LH to generate revenue growth in 2012. However, the pressure should be partly offset by expected revenue contribution from condominium projects that LH launched during 2010-2011. At the end of 2011, LH’s total value of non-transferred condominium projects was Bt5.1 billion. The condominium backlog was Bt2.8 billion, or about 14% of LH’s normal revenue base. The high-rise project value available for sales was Bt2.3 billion. Most of these high-rise projects will be ready to be transferred in 2012.
LH’s operating income before depreciation and amortization as a percentage of revenue was 19.3% in the first nine months of 2011. The operating margin is expected to be under greater pressure in 2012 from promotions for projects in flooded areas, rising material and land development costs, and expenses from the “Terminal 21” project. LH’s ratio of total debt to capitalization at the end of September 2011 stood at 48.9%. LH’s leverage is expected to stay elevated over the next few years taking into consideration inventory build-up and high dividend payout. LH’s debentures covenant limits the company’s debt to equity ratio at 1.25 times. At the end of September 2011, the ratio stood at 1.06 times. LH’s liquidity had weakened since 2010 due to a rise in the debt level, but remains acceptable. The company’s financial flexibility is enhanced by investments in associated firms with fair values at Bt25.3 billion.
Due to the heavy flooding, the sale of residential properties is expected to slow down, especially for the heavy flooded zones. Several developers might have a negative growth in revenue or even net losses in the last quarter of 2011. The government’s tax incentive scheme and zero-rate mortgage financing plans may not have a significant effect on the demand for residential property in the coming quarters, due to the negative consumer sentiment. Global economic uncertainties, the threat of rising costs from the possible enactment of the minimum-wage hike, and elevated leverage levels of most property developers are key downside risks for the industry, said TRIS Rating. -- End
Company Rating: Affirmed at A Issue Ratings: LH127A: Bt3,000 million senior debentures due 2012 Affirmed at A Up to Bt4,000 million senior debentures due within 2015 A Rating Outlook: Stable
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