TRIS Rating Co., Ltd. has assigned the rating of “BBB” to the proposed issue of up to Bt2,000 million in senior debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has affirmed the company and current issue ratings of CK at “BBB” with “stable” outlook. The proceeds from the new debentures will be used for working capital. The ratings reflect the company’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 an expectation that CK’s operating margins will remain at around current level for the next three years. 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 continues to invest in the Xayaburi project in the absence of comparable compensations to reduce unbilled receivables, or its net debt to equity ratio exceeds 2.5 times for an extended period, the company’s credit profile will be negatively impacted.
TRIS Rating reported that CK was established in 1972 by the Trivisvavet family. CK is one of the top three SET-listed E&C companies. The company’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.
TRIS Rating said, 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.
CK’s backlog improved markedly in the first quarter of 2012 after the company signed the Xayaburi project in Lao PDR worth Bt74 billion. At the end of March 2012, CK’s project backlog stood at Bt109,783 million. The Xayaburi project accounted for 62% of the total backlog.
CK’s strong backlog and expected projects in the pipeline have 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 reverted back to positive in the first quarter of 2012 as revenue was driven by more recent projects and costs remained under control. TRIS Rating expects CK’s operating margins before depreciation and amortization to sustain at around 5%-7% for the next three years.
CK’s financial leverage is high. At the end of March 2012, the debt to capitalization ratio was 76.6%. 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 ratio below 70% within the next few years.
CK’s liquidity ratios are weak, but improving. The ratings reflect CK’s financial flexibility through its large holding of shares in SET-listed companies. At the end of March 2012, the fair value of CK’s investments in the listed companies was Bt9 billion, about 39% of the company’s total debts of Bt23 billion. Cash on hand and marketable securities were at Bt4 billion. Long-term debts mature over the next 12 months are around Bt3.9 billion. TRIS Rating is monitoring on CK’s working capital which has tightened after the company has spent around Bt5 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 Bt8.7 billion at the end of March 2012, said TRIS Rating. — End
Company Rating: Affirmed at BBB Issue Ratings: 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 Up to Bt2,000 million senior debentures due within 2017 BBB Rating Outlook: Stable
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