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 with “stable” outlook. The proceeds from the new debentures will be used 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 a large holding of marketable securities. However, these factors are partially offset by the cyclical nature of the property development industry, profit margins under pressure from material and labor costs, and an expected elevation of leverage level in the medium term. 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, one of Thailand’s leading residential property developers, was established in 1983 by the Asavabhokhin family. As of June 2012, 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 (SDHs), which contribute around three quarters of total sales. 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 sales records, ranging between Bt16-Bt20 billion per annum over the past five years.
TRIS Rating expects LH to generate total revenue in a range of Bt19-Bt21 billion per annum for the next three years. At the end of March 2012, LH’s condominium backlog was Bt2.9 billion. About Bt2.2 billion of the backlog will be recorded as revenue in 2012. The comeback of the flood anxiety in late 2012 poses a downside risk to LH’s revenue. In such scenario, we view LH to achieve revenue in 2012 at least on par with revenue in the prior year.
LH’s operating income before depreciation and amortization as a percentage of revenue was 19.7% in the first quarter of 2012. The operating margin is expected to stay around 18%-19% in the medium term. The margin could be lower in the short term from rising material and labour costs, as well as higher costs to support business expansion.
LH’s leverage level is considered high for its rating category. The risk is partly offset by the holdings of sound income-generating assets and sizable marketable securities. LH’s total debt to capitalization ratio at the end of March 2012 stood at 45.8%. LH’s debt covenant limits the debt to equity ratio at 1.25 times. At the end of March 2012, the ratio stood at 0.8 times. TRIS Rating expects LH’s capital structure to remain under pressure for the next few years. The expected high level of debt takes into consideration consecutive launch plans for high-rise projects and aggressive dividend policy. LH expects to receive around Bt1.4 billion in cash from the set up of a new property fund, which should help alleviate LH’s need for external financing to an extent. LH’s liquidity profile is acceptable. The company’s financial flexibility is enhanced by investments in associated firms with the estimated fair values at Bt38.8 billion.
Due to the heavy flooding, the sale of residential properties is expected to slow down, especially for the heavy flooded zones. The government’s tax incentive scheme and zero-rate mortgage financing plan 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 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 LH149A: Bt900 million senior debentures due 2014 Affirmed at A LH153A: Bt3,100 million senior debentures due 2015 Affirmed at A Up to B2,500 million senior debentures due within 2016 A Rating Outlook: Stable
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