TRIS Rating has assigned a rating of “BBB-” to the proposed issue of up to Bt6,000 million in senior debentures of Italian-Thai Development PLC (ITD). At the same time, TRIS Rating has affirmed the company and current senior debenture ratings of ITD at “BBB-”. The outlook remains “stable”. The company will use the proceeds from the new debentures to repay debentures maturing in June 2014 and repay loans. ITD’s ratings reflect the company’s leading market position in domestic engineering and construction (E&C) industry, proven records in undertaking both public and private projects, a large and diverse project backlog, broad end-market served, and geographic diversification. However, the strengths are partially offset by ITD’s high financial leverage, execution risks from future long-term investment projects, and cyclicality of the E&C industry. The “stable” outlook reflects an expectation that ITD’s improving operating performance will continue to strengthen its capital structure, allowing the company to pursue long-term projects while sustaining the debt to capitalization well below 70%, or debt to equity lower than 2.3 times during 2014-2016.
ITD’s business profile is strong. The company is the largest SET-listed E&C contractor by revenue. ITD’s revenue in 2013 stood at Bt43.9 billion. The business profile is also supported by extensive track records in undertaking public and private sector clients. ITD owns raw material production facilities and a wide range of machinery and equipment fleets. During 2008-2013, revenues from domestic projects accounted for 60%-75% of total revenue. Meanwhile, revenues from overseas projects had been mainly derived from public infrastructure projects in India. Revenues from construction projects in buildings, ground transportation infrastructure, and airport and seaport accounted for 55%-65% of total revenues. ITD has four long-term investment projects; namely potash mining in Thailand, industrial estate in Myanmar, toll road in Bangladesh, and bauxite mine and alumina plant in Lao PDR. All four projects have not started generating construction revenues and recurring income for the company.
As of February 2014, ITD’s backlog stood at Bt264 billion. The backlog included Mozambique concession worth Bt120 billion, a toll road in Bangladesh worth Bt37.8 billion, both of which have not begun the construction, and the Hongsa mining in Lao PDR, worth Bt25.3 billion, which will be realized over 15 years. Excluding the Mozambique concession and the toll road projects, ITD’s backlog should secure revenues during 2014-2016 in a range of Bt20-Bt30 billion per annum. ITD’s lowest bid and nearly-signed projects included the five flood protection modules worth Bt53.4 billion, as well as bauxite mine and alumina plant in Lao PDR worth Bt15 billion.
ITD’s financial profile during 2013 to the first quarter of 2014 was in line with TRIS Rating’s base-case scenario. Operating margin (operating profit before depreciation and amortization as a percentage of revenue) at the end of March 2014 was 8.9%, decreased from 10.7% in 2013. Debt to capitalization during 2013 to the first quarter of 2014 was 70%, improving from 76% in 2012, after the company received Bt2 billion from the rights offering.
During 2014-2016, TRIS Rating’s base-case expects ITD’s revenues (excluding construction revenues from four long-term projects) in a range of Bt45-Bt60 billion per annum. Downside risk on revenue is moderate as the company’s backlog secures about half of TRIS Rating’s base-case revenues. ITD’s operating margins are expected to be quite stable and should stay higher than 7.5% under stress-case.
ITD’s debt to capitalization is expected to stay in a range of 60%-67%, or interest-bearing debt to equity at 1.5-2.0 times, during 2014-2016. The expected leverage level should give ITD with reasonable cushion against the financial covenant risk, which limits the net debt to equity ratio at 2.5 times. ITD is expected to generate funds from operations (FFO) at least Bt2.5 billion per annum. Capital expenditures are expected at Bt1-Bt2 billion per annum, except in 2015 when about Bt5.8 billion spending should be required for Hongsa project. Financing pressure from advance investments in Dawei project is not expected to increase further. The ratio of FFO to total debt is expected to stay higher than 10%. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage is expected to stay at least above 2 times.
Up to Bt6,000 million senior debentures due within 2019 BBB- Rating Outlook: Stable
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