TRIS Rating has upgraded the company and senior debenture ratings of CH. Karnchang PLC (CK) to “BBB+” from “BBB” with “stable” outlook. The rating upgrade reflects CK’s improving backlog quality and operating performance. In addition, the upgrade reflects an expectation that CK’s leverage will reduce meaningfully over the next 18 months, due to the sales of investments and positive progress on Xayaburi dam project. The “stable” outlook reflects an expectation that CK will be able to maintain its operating margins at approximately the current level in the medium term. In addition, CK’s leverage is expected to improve due to larger equity base from capital gains on the sale of TTW’s shares, as well as debt repayments with proceeds from the divestments and higher collections of receivables from the Xayaburi project.
CK’s credit ratings continue to 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 business synergy and 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 relatively high financial leverage.
Established in 1972 by the Trivisvavet family, CK is one of the three largest SET-listed E&C companies. The company’s construction experience ranges from general civil work to highly sophisticated projects. CK’s strategic investment portfolio includes three companies listed in the Stock Exchange of Thailand (SET): Bangkok Expressway PLC (BECL), Bangkok Metro PLC (BMCL), and Thai Tap Water Supply PLC (TTW), and two non SET-listed companies: CK Power Ltd. (CKP) and Xayaburi Power Co., Ltd. (XPCL).
CK’s backlog at the end of September 2012 was Bt124 billion, compared with Bt28 billion during 2010-2011. The larger backlog was mainly driven by Xayaburi dam project worth Bt76 billion and Si-Rat Outer Ring Road expressway project worth Bt23 billion. The backlog diversity is acceptable. The Xayaburi project accounted for 53% of the total backlog.
CK’s financial profile improved in 2012. Over the next three years, TRIS Rating expects CK to generate at least Bt25 billion in revenue per annum, of which revenues from the Xayaburi project are expected at Bt7-Bt8 billion per annum. The company’s strong backlog has already secured about 80% of the expected baseline revenues. The positive prospects of new launches in public infrastructure projects also help support CK’s medium-term revenue growth.
For the first nine months of 2012, CK’s operating margin was 5.9%. Most of the company’s current projects had been secured after 2010 and their costs have been under control. TRIS Rating expects that CK should be able to maintain its operating margins above 5% on average over the next three years.
CK’s financial leverage is expected to improve over the next 18 months. CK expects to receive Bt2.6 billion in 2013 and the remaining Bt0.7 billion during 2014-2015 from the sale of TTW’s shares to BECL. The sale of TTW’s shares also allows CK to reclassify its investment in TTW to fair market value, from an equity method. The gains from the accounting reclassification were estimated at Bt7 billion, assuming TTW’s stock price at Bt8.8 per share.
In addition, in the coming quarters, TRIS Rating expects CK’s unbilled receivables to decline meaningfully as XPCL accelerates its paid-up capital and loan drawdown in order to repay CK’s advanced construction activities. CK’s advanced investments had primarily increased its unbilled receivables from Bt3.8 billion in 2009 to Bt10 billion at the end of September 2012. At the end of September 2012, CK’s debt-to-capitalization ratio was 78.4%. The net-debt-to-equity ratio stood at 2.6 times. Under TRIS Rating’s baseline scenario, CK’s debt-to-capitalization ratio is expected to reduce and stay below 65% in the medium term. TRIS Rating views CK’s leverage level, which is higher than average contractors under the same rating category, as consistent with CK’s credit ratings taken into consideration the company’s business model as a contractor and an investment company.
CK’s liquidity profile is acceptable. During 2013-2015, CK’s funds from operations (FFO), excluding capital gains, are expected at least Bt1.2 billion per annum. CK plans to make equity investments in XPCL at Bt800-Bt1,000 million per annum. Capital expenditures are expected at Bt500-Bt1,000 million per annum for the next three years. At the end of September 2012, the fair value of CK’s investments in SET-listed companies was Bt14.6 billion, about 51% of the company’s total debts of Bt28.6 billion. The fair value rose to Bt17.5 billion by year-end 2012. At the end of September 2012, CK’s had cash on-hand and short-term securities at Bt7.5 billion. The company had Bt5.4 billion in long-term debts maturing in the next 12 months.
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 2013, 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.