TRIS Rating has assigned the rating of “BBB+” to the proposed issue of up to Bt4,000 million in senior debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has also affirmed the company and current senior debenture ratings of CK at “BBB+” with “stable” outlook. CK plans to use the proceeds from the new debentures for business expansion. 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 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. 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 further in the next 12 months due to the collections of receivables from the Xayaburi project.
Established in 1972 by the Trivisvavet family, CK is one of the three largest E&C companies listed on the Stock Exchange of Thailand (SET). The company’s construction experience ranges from general civil work to highly sophisticated projects. CK’s strategic investment portfolio includes three SET-listed companies: 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 March 2013 was Bt112.8 billion. Major projects in the backlog included Xayaburi dam project worth Bt60 billion, Si-Rat Outer Ring Road expressway project worth Bt22 billion, and the green-line electric-train project worth Bt10 billion. The Xayaburi project accounted for 53% of the total backlog.
CK’s financial profile has continued to improve since 2012 and remains in line with TRIS Rating’s expectation. Revenue in the first quarter of 2013 stood at Bt8.1 billion. Operating margin (operating income before depreciation and amortization as a percentage of revenues) was at 7.6%. In the first quarter of 2013, CK sold TTW’s shares to BECL for Bt3.3 billion. The company received Bt2.2 billion in the first quarter of 2013 and expected to receive the remaining Bt1.1 billion in installments within April 2015. CK recorded a one-time gain of Bt6 billion from the transaction and reclassified investment value in TTW to fair market value, from an equity method.
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 revenues. The positive prospects of new public infrastructure projects also help support CK’s medium-term revenue growth momentum. TRIS Rating expects that CK should be able to maintain its operating margins above 5% on average in the medium term.
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 for the Xayaburi project. The advanced activities had primarily increased CK’s unbilled receivables from Bt3.8 billion in 2009 to Bt13.1 billion at the end of March 2013. At the end of March 2013, CK’s debt to capitalization ratio improved to 64.7%, from 76.3% at the end of 2012. At the same time, the net debt to equity ratio fell to 1.5 times, from 2.6 times. TRIS Rating expects CK’s debt to capitalization ratio to continue staying 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 in a range of Bt800-Bt1,000 million per annum. Capital expenditures are expected at around Bt800 million per annum for the next three years. At the end of March 2013, the fair value of CK’s investments in SET-listed companies was Bt16.8 billion, about 56% of the company’s total debts of Bt30 billion. CK’s cash on-hand and short-term securities were at Bt5.7 billion. The company had Bt10.5 billion in long-term debts maturing in the next 12 months. The maturing debts are expected to be repaid by the collections of revenues from construction projects or refinanced by new debentures.
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