TRIS Rating has affirmed the company rating of Sino-Thai Engineering & Construction PLC (STEC) at “A-” with “stable” outlook. The rating reflects STEC’s leading market position as one of Thailand’s top three construction contractors, very strong financial profile, its large and diversified backlog, and its lengthy track record in both private sector and public sector clients. However, these strengths are partially offset by concern over political instability, which heightens risk across the industry. Political instability may cause delays in the launching of new public projects. In addition, STEC’s strengths are tempered by the volatile and cyclical nature of the engineering and construction (E&C) industry. The “stable” outlook reflects TRIS Rating’s expectation that STEC will continue its cost control practices. The company is expected to maintain its financial strength to contend the risk from rising construction costs, and/or cost overruns from project delays, and other unforeseen event risks.
STEC was established in 1962 by the Charnvirakul family and listed on the Stock Exchange of Thailand (SET) in 1992. STEC is the leading construction contractor in Thailand, with strong market positions in both the private and public sector customer segments. The company is ranked as a class 1 licensed contractor for all government authorities and state enterprises. STEC is one of the few prequalified construction contractors which is able to bid for large public works projects. Based on its proven track record and the strong support from a number of financial institutions, STEC has a good chance to win bids for several upcoming infrastructure projects. In addition to undertaking infrastructure projects, the company is known for its specialization in constructing power plants and petrochemical plants, plus its ability to undertake piping and steel structure fabrication work. In the past three years, STEC acquired three power plant construction contracts worth more than Bt20,000 million in total.
As of September 2013, STEC’s backlog was Bt58,511 million, up 33.2% from Bt43,930 million as of December 2012. A backlog of this size is equivalent to 3 times the company’s 2012 revenue. The high backlog will guarantee STEC’s revenue for at least the next three years. Approximately 47% of the total backlog comprises infrastructure projects, while 30% is construction of buildings, and 19% comprises power plant projects. STEC’s revenue in 2012 was Bt19,872 million, up 34% from 2011. Revenue in the first nine months of 2013 rose to Bt16,328 million, from Bt14,429 million in the same period of 2012. Revenue from constructing power plants accounted for 40%-47% of total revenue in 2012 through the first nine months of 2013, while revenue from infrastructure projects contributed around 43% of total revenue in the same period.
STEC’s financial profile remained healthy due to its strong profitability and low level of financial leverage. STEC’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) ranged from 7% to 9% during 2010-2013, up from around 5% in 2008 and 6% in 2009. STEC’s ability to control operating costs, as well as its strong bargaining power with suppliers, should continue to improve its profitability. The total debt to capitalization ratio has been kept below 10% since 2009. STEC’s liquidity position remains very strong. The company benefits from its low need for capital expenditures and modest working capital requirements. STEC’s working capital needs are supported in part by advance payments from project owners and the credit of suppliers.
TRIS Rating’s base case forecasts that STEC’s total revenue will range from Bt20-Bt25 billion per annum during 2013 through 2016. In addition, TRIS Rating’s base case assumes that STEC’s operating margin will stay at around 7% for the next three years. Funds from operations (FFO) are expected to be in the range of Bt1.2-Bt1.5 billion per annum from 2013 through 2016. The current rating already takes into account an expected rise in STEC’s financial leverage should the company invest in a property development project. Due to its net cash position, the company still has more headroom for its future investments. Even if it makes more debt-funded investments in the future, STEC’s debt to capitalization ratio is expected to stay below 30%.
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