TRIS Rating has upgraded the company and current issue ratings of Italian-Thai Development PLC (ITD) to “BBB-” from “BB+”. At the same time, the outlook has been revised to “stable” from “negative”. The rating actions reflect a decrease in ITD’s financial covenant risk following the completion of Bt2 billion right offering in August 2013. The rating actions also reflect an expectation that ITD’s operating performance will continue to improve and strengthen the company’s balance sheet against potential leverage pressures from long-term investment projects. The “stable” outlook reflects an expectation that ITD’s improving operating performance will continue to strengthen its capital structure, allowing the company to pursue long-term projects while sustaining the debt to capitalization well below 70%, or debt to equity lower than 2.3 times for the next three years.
ITD’s credit ratings continue to reflect the company’s leading market position in domestic engineering and construction (E&C) industry, proven records in undertaking both public and private projects, a large and diverse project backlog, broad end-market served, and geographic diversification. However, the strengths are partially offset by ITD’s high financial leverage, execution risks from future long-term investment projects, and cyclicality of the E&C industry.
ITD’s business profile is strong. The company is the largest SET-listed E&C contractor by revenue. ITD’s revenue in 2012 stood at Bt46.3 billion. The business profile is also supported by extensive track records in undertaking public and private sector clients. ITD owns raw material production facilities and a wide range of machinery and equipment fleets. Over the past five years, revenues from domestic projects accounted for 60%-75% of total revenue. Meanwhile, revenues from overseas projects had been mainly derived from public infrastructure projects in India. Revenues from construction projects in buildings, ground transportation infrastructure, and airport and seaport accounted for 55%-65% of total revenues. ITD has four long-term investment projects; namely potash mining in Thailand, industrial estate in Myanmar, toll road in Bangladesh, and bauxite mine and alumina plant in Lao PDR. All four projects have not started generating construction revenues and recurring income for the company.
As of June 2013, ITD’s backlog stood at Bt142.7 billion. The backlog included a toll road in Bangladesh worth Bt37.8 billion, which has not begun, and the Hongsa mining in Lao PDR, worth Bt25.3 billion, which will be realized over 15 years. Excluding the toll road projects, ITD’s backlog should secure revenues during 2014-2016 in a range of Bt20-Bt30 billion per annum. ITD’s backlog should improve further if the company could finalize on the five flood protection modules worth Bt53.4 billion, as well as bauxite mine and alumina plant in Lao PDR worth Bt15 billion.
ITD’s financial profile during 2012 to the first half of 2013 was better than TRIS Rating’s base-case scenario. Operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first half of 2013 and 2012 was 9.5% and 8.4%, respectively, up from 4%-5% during 2009-2011. Debt to capitalization at the end of June 2013 was 73.1%. However, the ratio should be improved to stay about 60%-67% after the company received Bt2 billion from the right offering in August 2013.
For the next three years, TRIS Rating’s base-case expects ITD’s revenues (excluding construction revenues from four long-term projects) in a range of Bt45-Bt60 billion per annum. Positive progresses on the long-term projects and potential increases in public spending on infrastructure projects give ITD a strong upside in revenue growth, especially from 2015 onwards. Downside risk on revenue is limited as the company’s backlog already secures about half of TRIS Rating’s base-case revenues. ITD’s operating margins are expected to be quite stable and should stay higher than 7.5% over the next three years. Pressures from construction and labour costs are expected to be manageable.
ITD’s debt to capitalization is expected to stay in a range of 60%-67%, or debt to equity at 1.5-2.0 times, for the next three years. The expected leverage level should give ITD with reasonable cushion against the financial covenant risk, which limits the net debt to equity ratio at 2.5 times. ITD is expected to generate funds from operations (FFO) at least Bt2.5 billion per annum. Capital expenditures are expected at Bt1-Bt2 billion per annum, except in 2015 when about Bt5.8 billion spending should be required for Hongsa project. Financing pressure from advance investments in Dawei project is not expected to increase further. The ratio of FFO to total debt is expected to stay higher than 10% on trailing 12 months. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage is expected to stay at least above 2 times.
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