TRIS Rating has affirmed the company and senior unsecured debenture ratings of Italian-Thai Development PLC (ITD) at “BBB-” with “stable” outlook. 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 operating performance will continue to strengthen its capital structure, allowing the company to pursue long-term projects while sustaining the debt to capitalization ratio 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 and Bt22.4 billion in the first half of 2014. 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 five long-term investment projects; namely potash mining in Thailand, industrial estate in Myanmar, toll road in Bangladesh, bauxite mine and alumina plant in Lao PDR, and railway and port concession in Mozambique. All projects have not started generating sizable construction revenues and recurring income for the company.
As of September 2014, ITD’s backlog stood at Bt250 billion. The backlog included a railway and port concession in Mozambique worth Bt112 billion and a toll road concession in Bangladesh worth Bt37.8 billion. Major construction works under both concessions have not begun. The backlog also included 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 about 40%-50% of revenues during 2014-2016. ITD’s lowest bid and nearly-signed projects include the five flood protection modules in Thailand worth Bt53.4 billion, as well as bauxite mine and alumina plant in Lao PDR worth Bt15 billion.
ITD’s financial profile during the past 12 months was in line with TRIS Rating’s base-case scenario, except the higher-than-expected leverage. Operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first half of 2014 was 8.9%, decreasing from 10.7% in 2013. Debt to capitalization ratio as of June 2014 was 72%, increasing from 70% in 2013, due to increases in receivables from the electric train projects.
During 2014-2016, TRIS Rating’s base-case expects ITD’s revenues (excluding construction revenues from five long-term projects) in a range of Bt45-Bt50 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 above 8% on average.
During 2014-2016, ITD’s debt to capitalization is expected to stay in a range of 65%-70%, or interest-bearing debt to equity at 2-2.3 times. The expected leverage level should give ITD with reasonable cushion against the financial covenant risk, which limits the net debt to equity ratio at 3 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 2014 where spending is expected to increase by Bt3.6 billion and in 2015 by Bt1 billion for the Hongsa project. 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 ratio is expected to stay at least above 2 times.
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