TRIS Rating has affirmed the company and existing senior debenture ratings of CH. Karnchang PLC (CK) at “BBB+”. At the same time, TRIS Rating has assigned the rating of “BBB+” to CK’s proposed issue of up to Bt3,000 million in senior debentures. CK plans to use the proceeds from the new debentures to repay maturing debts and for business expansion. TRIS Rating has also revised CK’s rating outlook to “positive” from “stable” to reflect the company’s improved leverage position and financial flexibility after reorganizing group businesses, which allowed the company to realize market value of the share holding in Thai Tap Water Supply PLC (TTW), enhance marketability of the share holding in CK Power PLC (CKP), and mitigate concerns over on-going financial supports for Bangkok Metro PLC (BMCL). The “positive” outlook reflects CK’s improved leverage position and financial flexibility from business reorganization, which allowed the company to realize market value of share holding in TTW, enhance marketability of share holding in CKP, and mitigate concerns over on-going financial supports for BMCL. The ratings could be upgraded if CK could sustain its operating margins above 5%, and the debt to capitalization (excluding debts from purple-line contract 4) below 67%, or interest-bearing debt to equity below 2 times.
CK’s credit 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 high financial leverage.
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 four SET-listed companies: Bangkok Expressway PLC (BECL), BMCL, TTW, and CKP, as well as a non SET-listed company: Xayaburi Power Co., Ltd. (XPCL).
CK’s backlog at the end of September 2013 was about Bt119 billion. Major projects in the backlog included Xayaburi dam project worth Bt53 billion, Si-Rat Outer Ring Road expressway project worth Bt21 billion, the purple-line train project contract 4 worth Bt20 billion, and the green-line train project contract 1 worth Bt9 billion. The Xayaburi project accounted for 45% of the total backlog.
In 2013, CK had executed several business reorganization transactions to improve its capital structure and financial flexibility. The company received about Bt3.9 billion in cash from the sales of partial interests in TTW (Bt2.4 billion), BMCL (Bt1.1 billion), and XPCL (Bt400 million). The company expected to receive another Bt913 million from the sale of TTW’s shares in installments by April 2015. The company recorded gains of about Bt7.5 billion in total from the aforementioned transactions, as well as reclassified the investment in TTW to fair market value approach, from an equity method. The listing of CKP on the SET helps enhance CK’s financial flexibility. BMCL’s financial profile had also improved after raising Bt8.55 billion from new share issuance, as well as converted loans from CK into equity. BMCL is not expected to require further financial supports from CK.
CK’s financial profile for the first nine months of 2013 was in line with TRIS Rating’s expectation. Revenue in the first nine months of 2013 stood at Bt25.1 billion. TRIS Rating’s base-case expects CK to generate at least Bt32 billion in revenue per annum during 2014-2016, of which revenues from the Xayaburi project are expected at Bt8-Bt10 billion per annum. The company’s strong backlog has already secured at least 80% of the base-case revenues. CK’s operating margin (operating income before depreciation and amortization as a percentage of revenues) for the first nine months of 2013 was at 7.8%. The ratings reflect an expectation that CK’s operating margins will stay above 5% on average for the next three years.
TRIS Rating views CK’s leverage level, which is higher than average contractors with the same ratings, as consistent with CK’s credit ratings taken into consideration the company’s business model as a contractor and an investment company. At the end of September 2013, CK’s debt to capitalization ratio improved to 67.3%, from 77.0% at the end of 2012. The improved leverage largely reflected an increase in equity base from the gains on share sales and the reclassification of TTW’s shares to reflect market value. However, CK’s total debts continued to increase from Bt28.6 billion at the end of 2012 to Bt34.1 billion at the end of September 2013, largely due to working capital and capital expenditures of the Xayaburi project. 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 Bt10 billion in 2012 to Bt14.2 billion at the end of September 2013. Over the next three years, TRIS Rating expects CK’s debt to capitalization ratio (excluding debts from purple-line contract 4) to stay below 67%.
During 2014-2016, CK’s funds from operations (FFO), including dividends from BECL and TTW, are expected at least Bt1.7 billion per annum. The expected FFOs should be adequate to finance capital expenditures at about Bt1 billion per annum, and equity investments in XPCL at Bt800-Bt1,000 million per annum. At the end of September 2013, the fair value of CK’s investments in four SET-listed companies was Bt18 billion, about 54% of the company’s total debts. CK’s cash on-hand and short-term securities were at Bt8 billion. The company had Bt11.2 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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