TRIS Rating has affirmed the company rating of Charn Issara Development PLC (CI) at “BBB-” with “stable” outlook. The rating reflects the company’s acceptable track record in middle- to high-end condominium segment and the recurring income from its hotel operations and from renting commercial office space. These strengths are partly offset by the company’s relatively small revenue base, fluctuating operating performance, and relatively high leverage. The rating also takes into consideration the cyclical and competitive nature of the property development industry and the expected slowdown in the domestic economy resulting from prolonged political turmoil. The “stable” outlook reflects the expectation that CI will be able to sustain its financial position during 2014-2016. The company is expected to deliver the units in its backlog on schedule. Since CI has several condominium projects under construction at the same time, its adjusted debt to capitalization ratio is expected to remain high but should stay below 65%. CI’s rating and/or outlook could be downgraded should its operating performance does not improve within the next 12 months. However, a significant improvement in its market share and financial risk profile will be positive for its ratings and/or outlook.
CI is a small property developer in Thailand. The company was established in 1989 and listed on the Stock Exchange of Thailand (SET) in 2002. The Issara family has been the company’s major shareholder since its inception. As of December 2013, the family held a 47.53% stake of the company. CI offers various types of residential property projects including condominiums, residential villas, single detached houses (SDHs), and townhouses. Its products mainly target the middle- to high-end market segments. Its residential projects are located in Bangkok and in provinces which are popular tourist destinations. As a small developer, the company has a small number of projects underway at any given time. CI had eight active projects as of December 2013. The remaining value of the unsold units in these projects was approximately Bt3,700 million. Nearly 75% of the remaining unsold value was in condominium projects, with the rest in residential villa, SDH, and townhouse projects. CI now has a backlog worth Bt3,828 million, with 67% of the backlog scheduled to be transferred during 2014-2015.
Apart from its residential property projects, CI started developing a luxury boutique hotel in Phuket named Sripanwa in 2006. Sripanwa is a premium quality project and has received a very favorable response from customers. In addition, the on-site hotel helps increase the value of the residential villas offered for sale inside the Sripanwa project. The Sripanwa hotel has generated progressively more income for the company every year since 2006. Revenue from the hotel amounted to Bt304 million in 2012 and Bt419 million in 2013. In 2013, CI sold the Sripanwa hotel to the Sri Panwa Hotel Property Fund (SPWPF), then leased back the hotel from the Fund. CI has a 15-years lease contract to operate the hotel. CI purchased 30% of SPWPF at the time the Fund was created. CI received around Bt1,400 million net in cash from the property fund and CI recorded a Bt767 million gain on the assets it sold to the Fund. CI also earns a recurring rental and service income of Bt80-Bt90 million per annum from renting the commercial space in two Bangkok office buildings, Charn Issara Tower I and II.
Due to the inconsistency launch of new projects, CI’s operating performance has been volatile. CI’s revenue and profitability were rather fluctuating. Total revenue was around Bt1,000 million per annum during 2008-2011, before leaping to Bt2,068 million in 2012. Revenue doubled because a large number of condominium units in “The Issara Ladprao” were transferred to customers. In 2013, revenue drop by 49% year-on-year (y-o-y) to Bt1,061 million due mainly to fewer residential units transferred. CI’s operating profit margin was 18%-19% in 2008 and 2009, but declined to 9% in 2010 and 11% in 2011. The operating profit margin recovered to 18% in 2012, but dropping to -16% in 2013 due to increase in selling and administration cost for advertising and promotion of its new projects.
CI has a high level of leverage. The debt to capitalization ratio ranged from 55% to 64% during 2008-2011. The ratio improved to 53% in 2012, after the company delivered the finished units in The Issara Ladprao project to customers. As of December 2013, the adjusted debt to capitalization ratio was 61%. CI’s financial leverage is expected to remain high during 2014-2016, as it plans to launch several new condominium projects.
Due to the relatively low operating profit margin and rising debt level, CI’s cash flow protection, the funds from operations (FFO) to total debt; dropped to -0.02% in 2010 and 3.01% in 2011, down from 7% in 2009 and 11% in 2008. Its cash flow protection improved to 15% in 2012 after the transfer of The Issara Ladprao. The cash received from selling the Sripanwa hotel to SPWPF in August 2013 cause its FFO to total debt to improve to 20.14%.
Under TRIS’s base-case scenario, CI’s revenue is expected to improve to around Bt2,000 million per annum. Its operating margin is expected to stay at around 12%-14%. Since the company has several projects under construction, its adjusted debt to capitalization ratio is expected to stay at around 60%-65%.
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