TRIS Rating Co., Ltd. has affirmed the company rating of Syntec Construction PLC (Syntec) at “BBB-” with “stable” outlook. The rating reflects the company’s position as a market leader in the construction of high-rise buildings, effective cost control, and strong balance sheet. These strengths are partially offset by the cyclical nature of the engineering and construction (E&C) industry, intense competition, a relatively low business diversity, and the company’s exposure to customer credit risk. In addition, Syntec’s earnings are vulnerable to rising labor and raw material costs since most of its projects are under fixed-price contracts. The “stable” outlook reflects the expectation that Syntec will sustain its competitive position in the private construction segment. Its operating performance is expected to recover in late 2012 once revenues from new contracts with higher profit margins are recognized. Should Syntec fail to improve its operating performance or to maintain leverage at an acceptable level, there may be an increasing pressure on rating downgrade.
TRIS Rating reported that Syntec was established in 1988. The company is a medium-sized general contractor, specializing in high-rise building construction. Most of its clients are in the private sector and cover a range of industries such as residential and retail property development, hotel, and manufacturing. Profitability in the private construction sector is usually higher than in the public sector. However, private sector projects are more sensitive to economic conditions. Thus, the company is more exposed to a potential decline in construction demand during an economic downturn. Syntec is also exposed to customer credit risk. The ability to screen and maintain customers with good credit quality is one of its key success factors. During the past few years, Syntec has built a reputation for construction quality and reliability, leading to several repeat customers such as Supalai PLC, Major Development PLC, and the Bangkok Hospital Group.
TRIS Rating said, as with other E&C companies in Thailand, Syntec is exposed to the volatility of raw materials prices since most of its contracts are fixed-price contracts. The company tries to mitigate this risk by locking raw materials prices whenever possible and reducing waste. The company closely monitors construction progress which helps reduce the likelihood of a huge unexpected loss when each project ends. As of March 2012, the company had 27 projects on hand. The backlog stood at Bt6,482 million, up 7% year-on-year (y-o-y) from the level in 2011. The current backlog is equivalent to 1.37 times Syntec’s total revenue in 2011.
Syntec’s operating performance in 2011 was weaker than expected. Without a reversal of rehabilitation debts worth Bt82 million, net profit would have fallen below Bt10 million, the smallest profit in the past six years. There were several reasons for the weak operating performance: revenue was lower than expected due to the severe flooding in the last quarter of 2011, several luxury condominium projects currently under construction posted cost overruns, and Syntec made some provision for bad debts. In 2011, Syntec set aside Bt138 million as a provision for bad debts, mainly due to the Baan Aue-Arthorn projects. Consequently, operating margin before depreciation and amortization expenses dropped to 1.8% in 2011 from 4.12% in 2010. The pressure on the operating margin continued through the first quarter of 2012, as the operating margin dropped to -2.33%. Although Syntec’s construction sites were not flooded in the last quarter of 2011, the flooding caused delays in the completion of the company’s several projects. Syntec thus incurred additional on-site overhead costs. The implementation of the Bt300 daily minimum wage scheme in April 2012 is also expected to weaken Syntec’s profitability, since a large portion of its backlog comprises projects that were signed before 2012 under fixed-price contract. Thus, the company has to absorb the cost increases in its old projects. However, the operating margin is expected to recover in late 2012, as most of the projects showing cost overruns will be completed. In addition, new project revenue streams will start to be recognized. The new orders, with contracts signed in 2012, incorporate the higher minimum wages and thus are more profitable than the older projects in the backlog. As of March 2012, approximately 28% of Syntec’s backlog incorporated the higher minimum wages in the contract price.
Despite the weak operating performance over the past two years, Syntec has maintained a strong balance sheet and adequate cash flow. As of March 2012, total debt was Bt661 million, down from Bt703 million in 2011. The amount of unrestricted cash and short-term investments stood at Bt275 million, or 42% of outstanding debts. The company’s capital structure was strong with the total debt to capitalization ratio at 22.77%. The funds from operations (FFOs) to total debt ratio in the first quarter of 2012 was 11.13% (non-annualized) and is expected to improve in the second half of the year, as the operating margin improves. Going forward, the company plans to invest around Bt1,000-Bt1,200 million in serviced apartment over the next five years. This investment will cause the level of debt to rise. However, the company is expected to maintain the debt to capitalization ratio below 40% during the investment period, said TRIS Rating. — End
Company Rating: Affirmed at BBB- Rating Outlook: Stable
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.