TRIS Rating has assigned the rating of “BBB+” to the proposed issue of up to Bt2,500 million in senior unsecured debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of CK at “BBB+”. The outlook remains “positive”. CK plans to use the proceeds from the new debentures to repay maturing debts and for business expansion. 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. 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 and enhance marketability of share holding in CKP. The ratings could be upgraded if CK could sustain its operating margins above 5%, and the debt to capitalization (excluding debts from the purple-line train project contract 4) below 67%, or interest-bearing debt to equity below 2 times.
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), Bangkok Metro PLC (BMCL), TTW PLC (TTW), and CK Power PLC (CKP), as well as a non SET-listed company: Xayaburi Power Co., Ltd. (XPCL).
CK’s backlog at the end of March 2014 was about Bt104 billion. Major projects in the backlog included Xayaburi dam project worth Bt45 billion, the purple-line train project contract 4 worth Bt20 billion, Si-Rat Outer Ring Road expressway project worth Bt19 billion, and the green-line train project contract 1 worth Bt8 billion. The Xayaburi project accounted for 43% of the total backlog.
CK’s financial profile for the past 12 months ending March 2014 was in line with TRIS Rating’s expectation. 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) is expected to stay at least above 5% on average during 2014-2016.
TRIS Rating views CK’s leverage level, which is higher than average contractors with the same ratings, is 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 March 2014, CK’s debt to capitalization ratio stood at 70%. Excluding debts from the purple-line train project contract 4, the debt to capitalization ratio was about 67%. During 2014-2016, TRIS Rating expects CK’s debt to capitalization ratio (excluding debts from the purple-line train project contract 4) to stay relatively close to the current level at about 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 FFO 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 March 2014, the fair value of CK’s investments in four SET-listed companies was Bt21.3 billion, about 54% of the company’s total debts. CK’s cash on-hand and short-term securities were at Bt3 billion. The company had Bt7.6 billion in long-term debts maturing in the next 12 months. The maturing debts are expected to be repaid by revenues from construction projects and dividends from investments, or refinanced by new debentures.
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