TRIS Rating has assigned the rating of “BBB” to the proposed issue of up to Bt800 million in senior debentures of SC Asset Corporation PLC (SC). At the same time, TRIS Rating has affirmed the company rating of SC at “BBB+” and has affirmed the existing rating of SC’s senior debentures at “BBB”. The outlook remains “stable”. The proceeds from the new debentures will be used for project development. The ratings reflect SC’s acceptable track record in the middle- to high-end segments of the residential property market, the reliable cash flow stream from its rental property business, and the expected continuing growth in its revenue. These strengths are partially offset by a higher financial leverage and a declining operating profit margin. The ratings also take into consideration the cyclical and competitive nature of the property development industry, plus concerns over rising operating costs and the widespread labor shortage among contractors. The “stable” outlook reflects the expectation that SC will be able to maintain its competitive position and financial profile in the medium term. Operating margin is not expected to be lower than 15% in the next three years. In addition, the debt to capitalization ratio is expected to stay in a range of 55%-60%. Further deterioration in profitability or a rise in leverage above 60% will negatively impact the company’s ratings.
SC was established in 1989. After a takeover by the Shinawatra family in 1995, the company began a rental property business by developing Shinawatra Tower 3. In 2003, SC reorganized its business to focus on residential property. The company was listed on the Stock Exchange of Thailand (SET) in 2003. The Shinawatra family has continued to be the company’s major shareholder with a 60.13% stake as of May 2013. SC offers a various type of residential property products, including single detached house (SDH), townhouse, home office, and condominium.
SC’s existing residential products target middle- to high-income customers, with an average price of Bt6.2 million per unit at the end of September 2013. As of September 2013, SC had 30 existing projects available for sale with remaining value of around Bt24 billion. The company had a total backlog of around Bt12 billion. The units in the backlog will be delivered to customers from now through 2016. During 2012 through the first half of 2013, sales of SDH units remained the major source of revenue, constituting more than 65% of total revenue; condominiums and townhouses accounted for around 25% combinedly. Income from rental property comprised around 10% of total revenue.
SC’s presales in 2012 rose by 51% year-on-year (y-o-y) to Bt12,249 million. Presales in the first nine months of 2013 increased to Bt10,393 million from Bt8,620 million in the same period of 2012. The growth in presales was due to good responses to new condominium projects launched since 2012. Condominium presales in 2012 through the first nine months of 2013 accounted for around 50% of total presales.
SC’s total revenue in 2012 was Bt8,358 million, up 14% from Bt7,354 million in 2011. Revenue from residential sales increased to Bt7,555 million in 2012 from Bt6,526 million in 2011, while revenue from rental property held at around Bt800 million per year. During the first six months of 2013, total revenue rose sharply to Bt4,428 million, from Bt2,743 million in the same period of 2012. Sales of SDH units continued to be the growth driver. TRIS Rating’s base case assumes SC’s total revenue at around Bt9 billion in 2013. In 2014 and 2015, total revenue is expected to be in a range of Bt11-Bt12 billion per annum due to higher condominium project transfers.
SC’s profitability has been moderate. The gross profit margin has remained high, at 37%-39% of sales during 2011 through the first half of 2013. However, the operating margin, measured as operating income before depreciation and amortization as a percentage of sales, decreased to 13.88% in the first half of 2013 from 16.92% in 2012, and 20.92% in 2011 due to higher marketing expenditures from the launches of new condominium projects in the past two years. A mismatch between marketing expenditures and revenue recognition from condominium units pushed selling, general, and administrative expenses (SG&A) as a percentage of sales high. However, TRIS Rating expects that SC’s operating margin should not be lower than 15% over the next three years because the company will start recognizing revenue from its previously launched condominium projects. As of June 2013, the total debt to capitalization ratio rose to 56.05% from 52.89% in 2012 due to more projects under development. Total debt to capitalization ratio is expected to be in a range of 55%-60% in the next three years due partly to more condominium projects investment. The funds from operations (FFO) to total debt ratio decreased to 9.49% (annualized with trailing 12 months) at the end of June 2013 from 12.70% in 2011. However, liquidity remained acceptable, supported by undrawn committed credit facilities of Bt3,469 million as of June 2013 and expected FFO of Bt1,000 million in 2013 and Bt1,600 million per annum in 2014 and 2015.
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