TRIS Rating has affirmed the company rating of SC Asset Corporation PLC (SC) at “BBB+” and affirms the rating of SC’s senior unsecured debentures at “BBB”. The outlook remains “stable”. The ratings reflect SC’s acceptable track record in the middle- to high-end segments of the residential property market, the reliable cash flow streams from the rental property segment, and steadily growing revenues. These strengths are partially offset by higher financial leverage and a declining operating profit margin. The ratings also take into consideration the cyclical and competitive nature of the property development industry. The “stable” outlook reflects the expectation that SC will be able to maintain its competitive position and financial profile in the medium term. The operating margin is expected to be around 15% over the next three years. In addition, the debt to capitalization ratio is expected to stay in a range of 50%-60%. The company’s ratings will be lowered if profitability deteriorates further or if the total debt to capitalization ratio rises above 60%.
SC was established in 1989. After being taken over by the Shinawatra family in 1995, the company entered the rental property business by developing Shinawatra Tower 3. In 2003, SC reorganized its business to focus on residential property development. The company was listed on the Stock Exchange of Thailand (SET) in 2003. The Shinawatra family has continued to be the company’s major shareholders, with a 60.1% stake as of May 2014. SC offers a number of residential property products, including single detached houses (SDH), townhouses, home offices, and condominiums.
SC’s existing residential property products target middle- to high-income customers, with an average price of Bt6.8 million per unit at the end of June 2014. As of June 2014, SC had 29 projects available for sale. The value of the remaining unsold units in the 29 projects was around Bt24.5 billion. The company’s backlog is worth around Bt11.6 billion. The units in the backlog will be delivered to customers from the second half of 2014 through 2016. During 2013 through the first half of 2014, sales of SDH units comprised more than 65% of total revenue, the major source of revenue. Condominiums and townhouses accounted for around 25% of revenue combined. Income from rental property comprised around 10% of total revenue.
SC’s presales in 2013 rose by 10% year-on-year (y-o-y) to Bt13,532 million. Presales in the first half of 2014 decreased to Bt3,463 million, a decline of 50% y-o-y. The drop in presales was due to the political unrest from the last quarter of 2013 through the first quarter of 2014. In addition, the company launched only two low-rise housing projects in the first half of 2014, compared with launched four condominium projects and one housing project in the first half of 2013. Condominium presales in the first half of 2014 made up only 17% of total presales, compared with 53% in the same period of the previous year. The company plans to open five new projects in the second half of 2014, worth around Bt8,000 million in total. TRIS Rating expects SC’s presales will recover to Bt8,000-Bt11,000 million per year during 2014-2016.
SC’s total revenue in 2013 was Bt10,031 million, up 20% from Bt8,358 million in 2012. Revenue from residential property sales increased to Bt9,201 million in 2013, from Bt7,555 million in 2012, while rental income from commercial property held at around Bt800 million per year. During the first half of 2014, total revenue was Bt4,309 million, down from Bt4,428 million in the same period of 2013. Sales of SDH units continued to drive SC’s revenues higher. TRIS Rating’s base case forecast assumes SC’s total revenue will range from Bt11,000-Bt14,000 million per annum during 2014-2016. SC plans to sell and transfer more condominiums in the next two years.
SC’s profitability has been moderate. The gross profit margin has remained high, at 36%-37% of sales during 2012 through the first half of 2014. However, the operating margin, measured as operating income before depreciation and amortization as a percentage of sales, decreased to around 14% during 2013 through the first half of 2014, compared with 16.92% in 2012, and 20.92% in 2011. Marketing expenditures were higher in 2013 and 2014 because SC launched some new condominium projects in the past two years. A mismatch between marketing expenditures and the revenue recognized from selling condominium units pushed the ratio of selling, general, and administrative expenses (SG&A) as a percentage of sales higher. However, TRIS Rating expects that SC’s operating margin should not be lower than 15% over the next three years because the company will start recognizing revenue from the condominium projects it has already launched.
SC’s leverage has increased continuously over the past few years because condominium projects now comprise a large portion of its project portfolio. As of June 2014, the total debt to capitalization ratio rose to 58.4%, from 55.5% in 2013, since most of SC’s condominium projects were under development. The rising debt level, coupled with the declining profitability, caused SC’s funds from operations (FFO) to total debt ratio to drop from 10% or more to 7%-8% during 2013 through the first half of 2014. However, this ratio is expected to improve to 10%-12% once the company starts clearing its condominium backlog during the remainder of 2014 and over the next two years. The company finances its investments in land and construction costs with project loans from banks. As a result, the cash inflows from the transfers of completed housing units will match its debt repayment obligations. As of June 2014, SC must repay debts of Bt10,625 million over the next 12 months. Around 80% of the amount due are loans from financial institutions and 20% are bond redemptions. The company plans to refinance its bonds and repay its bank loans with the cash it expects to receive from transferring completed units in its backlog to customers. In addition, the company has undrawn committed credit facilities of Bt4,419 million.
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