TRIS Rating has affirmed the company rating of Syntec Construction PLC (SYNTEC) at “BBB-” with “stable” outlook. The rating reflects the company’s proven record in high-rise building construction projects and moderate backlog size. These strengths are partially offset by cyclicality of the engineering and construction (E&C) industry, high concentration risk in end-markets served, and an expected rise in financial leverage. The “stable” outlook reflects the expectations that SYNTEC’s operating margins will continue to improve from the second half of 2013 as pressures from construction costs are expected to be manageable and losses from Baan Aue-Arthorn project are fully reserved. In addition, the company’s investments in serviced apartment projects are not expected to increase the debt to capitalization above 50%, or interest bearing debt to equity above 1 time.
SYNTEC was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1993. The company is a general contractor focusing on high-rise buildings in the private sector. Revenue in 2012 stood at Bt4.9 billion and revenue in 2013 is expected at Bt6 billion. Revenues from condominium projects accounted for about 90% of total revenues. The company’s moderate business profile reflects the track records in undertaking residential and commercial high-rise building projects mostly in Bangkok areas. Most of the company’s clients are property developers listed on the SET and have acceptable credit profiles. For the past three years, SYNTEC’s biggest client is Supalai PLC, which has contributed about a third of the company’s revenues. SYNTEC’s revenues from largest projects accounted for about 15% of total revenues. SYNTEC is occasionally exposed to delay payments from and legal disputes with project owners.
As of June 2013, the company’s backlog stood at Bt7.5 billion. The backlog largely secures about half of SYNTEC’s base-case revenues expected by TRIS Rating until 2014. About half of the backlog is expected to be recognized as revenues in the second half of 2013 and the remaining half of 2014.
SYNTEC’s financial performance in 2012 remained weak, but slightly improved in the first half of 2013. The overall financial profile remained in line with TRIS Rating’s base-case scenario, taken into account the impacts from the flooding in late 2011 as well as the minimum wage hike policy since April 2012 and losses from Baan Aue-Arthorn project. SYNTEC’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first half of 2013 improved to 3.6%, compared with 1.8% during 2011-2012. The improvement reflected the gradual completions of projects secured before 2012, in which the wage-hike factor had not been fully added into the contract prices. SYNTEC’s debt to capitalization ratio at the end of June 2013 stood at 23.7%, a relatively stable level compared with the past three years.
For the next three years, TRIS Rating’s base-case expects SYNTEC to generate revenues in a range of Bt6-Bt6.7 billion per annum. This includes rental income from new investments in serviced apartment projects, which are expected to be realized from 2014 at about Bt100 million and rise to about Bt500 million in 2017. SYNTEC plans to spend about Bt2 billion over the next three years to develop four serviced apartments targeting foreigners in Bangkok, Sriracha, and other provincial areas. The upside for construction revenue growth is limited as stable growth is expected for the city condominium market. SYNTEC’s revenue is facing downside risks from very low backlog securing revenues after 2014 and potential slowdown in residential property markets.
TRIS Rating’s base-case expects SYNTEC’s operating margins to improve gradually from about 4% in 2013 to stay in a range of 6%-7% for the next three years. The company’s funds from operations (FFO) are expected at Bt200-Bt300 million per annum. The investments in serviced apartments are expected to raise the company’s debt to capitalization ratio from 29.7% at the end of June 2013 to peak at about 50% in 2016. Cash flow protections as measured by FFO to total debt and EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage are expected to be weaker due to higher leverage level, but should remain consistent with the current rating. For the next three years, the company’s FFO to total debt ratio is expected to stay above 10% on average, while the EBITDA interest coverage is expected to be above 3.5 times.
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