TRIS Rating has affirmed the company rating of Sansiri PLC (SIRI) at “BBB+” and has affirmed SIRI’s existing senior debenture ratings at “BBB”. At the same time, TRIS Rating has revised the rating outlook of SIRI to “stable” from “positive”. The revised downward outlook reflects SIRI’s lower-than-expected operating performance and higher financial leverage.
The ratings continue to reflect the company’s leading position and proven record in the residential property development industry, well-recognized condominium and housing brands, and diverse product portfolio. These strengths are partially offset by SIRI’s relatively high financial leverage compared with most leading property developers, high selling and administrative (SG&A) expenses, and concern over rising backlog cancellation from customers. The ratings also take into consideration the cyclical nature of the property development industry, plus concerns over the political unrest which has led to low consumer confidence and stagnant demand in residential property development. The “stable” outlook reflects the expectation that SIRI will be able to deliver a huge backlog as scheduled. The operating margin should be maintained at above 10% over the next three years. SIRI should keep the debt to capitalization ratio at no more than 67% or the interest-bearing debt to equity ratio at less than 2 times in the medium term.
SIRI is one of the leading property developers in Thailand. As of March 2014, the company had 114 residential projects in its portfolio, worth a total of around Bt140,000 million. The portfolio consists of condominium (60% of the total portfolio value), single-detached house (SDH, 32%), and townhouse (8%) projects. The average unit price across the portfolio was Bt3.3 million. At the end of March 2014, SIRI had a huge backlog worth Bt51,000 million and the unsold units worth Bt57,000 million. SIRI’s main competitive edge is derived from its well-accepted brand name and well-executed marketing strategies.
SIRI’s presales was around Bt42,000 million per annum during 2012-2013. Net presales during the first quarter of 2014 shrank to Bt388 million, dropping significantly from Bt20,903 million during the same period of 2013. High cancellation units, especially in “dcondo” condominium projects, caused relatively low net presales. Condominium showed a negative presales of around Bt1,800 million, while presales from SDHs and townhouses were around Bt2,200 million. With small presales and lower number of new projects to be launched in 2014, TRIS Rating expects that SIRI’s presales in 2014 will be lower than those in 2012 and 2013.
Total revenue of SIRI in 2013 was Bt28,597 million, a 4% year-on-year (y-o-y) drop. Its revenue was lower than TRIS Rating’s expectation as SIRI could not deliver the condominium backlog as scheduled. This was due mainly to high backlog cancellation caused by lower consumer confidence on local economy and a delay in Environmental Impact Assessment (EIA) permit. Under TRIS Rating’s base-case scenario, SIRI should be able to manage the transfer of the backlog units as planned. Its revenue in 2014 should not be lower than Bt20,000 million, the same amount as secured backlog of this year.
SIRI’s gross profit margin had been 33%-34% of total revenue during the past four years. SG&A expenses remained high at 20% during 2011-2012, and increased to 24% in 2013. As a result, the operating margin (as measured by operating income before depreciation and amortization as a percentage of sales) continued to decrease from 16% in 2010 to 10% in 2013. Over the next three years, TRIS Rating expects that SIRI’s operating margin should not further deteriorate from the current level. SIRI’s financial leverage was relatively high. The debt to capitalization ratio was 61%-63% during 2010-2012, and the ratio rose to 67% in 2013. SIRI should keep its debt to capitalization ratio lower than 67% in the medium term in order to maintain its current ratings. SIRI’s liquidity weakened as the ratio of funds from operations (FFO) to total debt declined to 4% in 2013 from 12%-14% during the past four years. Under low consumer confidence and sluggish demand in residential property market, TRIS Rating expects that SIRI will continuously manage its liquidity. The company is expected to generate a minimum FFO at around Bt2,000 million per annum.
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