TRIS Rating has affirmed the company rating of Syntec Construction PLC (SYNTEC) at “BBB-” with “stable” outlook. The rating reflects the company’s proven record in high-rise building construction projects and moderate backlog size. These strengths are, nevertheless, partially offset by cyclicality of the engineering and construction (E&C) industry, high concentration risk in end-markets served, and expected higher leverage. The “stable” outlook reflects the expectations that SYNTEC’s operating margins will stabilize as projects with cost overruns have gradually been completed, and construction costs are likely to be manageable. In addition, the company’s investments in serviced apartment projects are not expected to raise the debt to capitalization above 40%, or interest bearing debt to equity above 0.7 times.
SYNTEC, established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1993, is a general contractor focusing on high-rise buildings in the private sector. Its revenues stood at Bt6.2 billion in 2013, and are expected at Bt6.6 billion in 2014.
SYNTEC continued to pursue its business diversification strategy into the rental business by acquiring a 20-year lease right of Natural Ville Residence, a serviced apartment located on Langsuan Road. Still, revenues from the construction business took the majority, of which nearly 80% was made up by condominium projects.
SYNTEC’s moderate business profile reflects the track records in undertaking residential and commercial high-rise building projects mainly in Bangkok areas. Most of its clients are property developers listed on the SET and have acceptable credit profiles. For the past three years, the company’s biggest client was Supalai PLC (SPALI), who contributed approximately a third of its revenues. At the same time, the largest project made up about 15% of SYNTEC’s revenues. The company is occasionally exposed to delay payments from and legal disputes with project owners.
As of August 2014, SYNTEC’s backlog stood at Bt10.3 billion. The backlog largely secures about 70% of the company’s expected revenues in 2015, and 30% in 2016.
SYNTEC reported an improvement in its financial results in 2013 and the first half of 2014, boosted by a continued improvement in its operating margins (operating profit before depreciation and amortization as a percentage of revenue). The performances were in line with TRIS Rating’s projection. The recovery reflected gradual completions of the projects secured before 2012, some of which incurred cost overruns as a consequence of the floods in late 2011, and the minimum wage hike policy since April 2012.
SYNTEC’s operating margin improved to 9.2% in the first half of 2014, compared with 5.5% in 2013. Its debt to capitalization ratio at the end of June 2014 stood at 26.1%, a relatively stable level compared with that over the past three years. The company’s cash flow protections, as measured by FFO (funds from operations) to total debt and EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage, also showed an improvement. The former ratio increased to 57.7% (trailing 12 months), and the latter ratio rose to 11.4 times in the first half of 2014, in comparison with 30.2% and 7.3 times respectively in 2013.
During 2014-2017, TRIS Rating expects SYNTEC to generate revenues in a range of Bt6-Bt7 billion per annum, including rental income from serviced apartment projects. The rental income is expected to be realized at nearly Bt100 million in 2014 from one project, and rise to about Bt300-Bt400 million by 2018 when other three projects are completed. The upside for construction revenue growth is limited as stable growth is expected for the city condominium market.
During 2014-2017, TRIS Rating’s stress case expects SYNTEC’s operating margin to stay above 7% on average, which will lead its FFO to be in a range of Bt300-Bt400 million per annum. Comparing to its capital expenditure plan of about Bt600 per annum, most of which will mainly be driven by the investments in serviced apartments, SYNTEC’s debt to capitalization ratio is likely to rise, but should stay below 40%.
Cash flow protections are expected to be slightly weaker due to the higher leverage level, but should remain consistent with the current rating. On average, the company’s FFO to total debt ratio is expected to stay above 20%, while the EBITDA interest coverage is expected to be above 5 times for the next three years.
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