TRIS Rating has affirmed the company rating of Areeya Property PLC (Areeya) at “BBB-”. At the same time, TRIS Rating has revised Areeya’s outlook to “negative” from “stable”. The “negative” outlook reflects the lower-than-expected operating performance of the company, an expected rise in financial leverage, and a concern over the company’s ability to comply with its bond covenants. Under the terms of the bond indenture, the company has to keep the interest bearing debt to equity ratio less than or equal to two times. The rating continues to reflect the company’s acceptable track record in the middle- to high-end segment of the residential property development market, the cyclical nature of the property development industry, and concerns over rising construction costs and the current labor shortage.
The “negative” outlook reflects Areeya’s weaker financial profile than expectation plus concern over the company’s ability to comply with its bond’s financial covenant. The rating could be downgraded if its operating performance decline further and the company cannot manage its capital structure to comply with its bond’s covenant. On the other hand, the outlook could be revised back to “stable” should its operating profit margin improve to around 10%-15% and the company can maintain its total debt-to-equity ratio lower than 2 times on a sustainable basis.
Areeya was established by Laohapoonrungsee family in 2000 and listed on the Stock Exchange of Thailand (SET) in April 2004. Mr.Wisit Laohapoonrungsee has been Areeya’s chairman and chief executive officer. The Laohapoonrungsee family has been the company’s major shareholders since inception, owning a 42% stake as of October 2013. Areeya offers a wide range of residential property products including single detached houses (SDHs), semi-detached houses (semi-DHs), townhouses, and condominiums. Its products target the middle- to high-end market segments. As of September 2013, Areeya had 29 active projects. The remaining unsold units in all of its active projects were valued around Bt10,800 million. More than half (57%) of the value of the remaining projects was in condominium projects, 36% was in townhouse projects, and 7% was in SDH projects. Areeya has a backlog worth Bt2,717 million, mostly in condominium projects.
Areeya’s revenue has fluctuated because it did not launch an equal number of the new condominium projects each year. Since 2009, revenue from the sale of townhouse has held steady at around Bt800-Bt1,400 million per year. Areeya’s revenue recorded Bt3,436 million in 2009 and Bt3,334 million in 2010. Sales in both years were driven by transfers of condominium units in the A Space Asoke-Ratchada projects. Transfers from these two projects were Bt1,800-Bt2,200 million each year in 2009 and 2010. Total revenue declined to Bt1,500 million in 2011 and Bt1,800 million in 2012. Revenue in the first nine months of 2013 was Bt1,262 million, mostly from sales of townhouses. Areeya’s operating profit before depreciation and amortization as percentage of sales continuously dropped from a peak of 21% in 2009 to 9% in 2012.
Areeya has a rather high level of leverage. As of September 2013 Areeya’s interest-bearing debt to equity ratio was 1.97 times. The debt to capitalization was 66% (excluding capitalized annual leases), increasing from 62% in 2012. Areeya’s financial leverage is expected to rise in 2014-2015, as several new condominium projects will be under construction. Areeya’s net profit was low while the level of debt rose. Cash flow protection has deteriorated because net profit fell and the level of debt rose. The ratio of funds from operations (FFO) to total debt declined from 2.52% in 2012 to 1.0% in September 2013 (annualized with trailing 12 months).
Rating Outlook: Negative
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