TRIS Rating has affirmed the company rating of Univentures PLC (UV) at “BBB”. At the same time, TRIS Rating has revised upward the rating outlook of UV to “positive” from “stable”. The “positive” outlook reflects an expected improvement in the company’s business risk profile, supporting by an expected larger portion in revenue from low-rise residential property projects and rental income from commercial assets. In addition, leverage is expected to remain at around the current level.
The rating continues to reflect UV’s larger capital base after it increased the share capital by Bt5,700 million in late 2012 in order to acquire shares of Golden Land Property Development PLC (GOLD) and Grand Unity Development Co., Ltd. (GUD). The rating also reflects the strong support UV receives from its major shareholder, Adelfos Co., Ltd. (Adelfos), and its evolving brand recognition in residential property market. However, these strengths are offset by UV’s relatively high financial leverage from business expansion and its lower operating margin than those of most listed property developers. The rating also takes into consideration the cyclical and competitive nature of the property development sector.
The “positive” outlook reflects the expectation that UV’s operating performance will improve in terms of higher income from residential projects and rental properties. UV’s rating could be upgraded should its revenue and profitability improve while its debt to capitalization ratio is kept lower than 55% during the expansion period. On the contrary, the rating or the outlook should be revised downward if its operating performance is lower than expectation and/or its debt to capitalization ratio exceeds 60% on a sustainable basis.
UV was founded in 1980 as a zinc oxide producer. The company shifted to property development in 2000 by investing in a number of joint ventures with some listed property developers. Adelfos purchased 51.6% of UV’s shares in 2007 and became its controlling shareholder. As of October 2014, Adelfos held a 66.01% stake in UV. Adelfos is owned by the second generation of the Sirivadhanabhakdi family. The family owns and manages a number of property companies under the TCC Group. In late 2012, UV increased its share capital to Bt6,975 million from Bt1,240 million to acquire a 50.64% stake in GOLD and increase its shareholding in GUD to 100% from 60%. Presently, UV owns 55.73% of GOLD.
After the acquisition of GOLD, revenue from residential projects contributed around 60% of UV’s total revenue. The rental property and zinc oxide segments each comprised around 20% of total revenue. As of September 2014, UV owned 17 residential property projects. Its project portfolio comprises eight condominium projects and nine housing projects. GUD develops the condominium projects while GOLD develops the housing projects. UV had around Bt12,000 million worth of unsold units (including built and un-built units) across its project portfolio as of September 2014. UV’s backlog is worth Bt7,000 million. The units in the backlog will be delivered to customers during the remainder of 2014 through 2016. UV’s presales significantly improved during the last two years. Presales soared to Bt4,294 million in 2013 and Bt6,108 million in the first nine months of 2014, up from Bt2,538 million in 2012. Revenue from residential sales amounted to Bt3,745 million in 2013, a 19% year-on-year (y-o-y) rise. During the first nine months of 2014, revenue from residential projects grew by 39% y-o-y.
In October 2014, GOLD announced its plan to acquire at least 51% of Krungthep Land PLC (KLAND), at a price of Bt2 per share. If GOLD acquires all of KLAND’s shares, the total purchase price will be Bt3,560 million. GOLD plans to finance this acquisition with a one-year term loan from financial institutions. After acquiring KLAND, UV’s consolidated asset base will increase by Bt6,000 million. In addition, by acquiring KLAND’s housing project portfolio, UV portfolio will extend to the high-end housing segment. UV expects to complete the acquisition by the end of 2014. The transaction is subject to the shareholder approval at the extraordinary general meetings (EGM) of UV and GOLD on 9 December 2014.
Over the next three years, UV’s total revenue is expected to reach Bt10,000 million per annum, as the company plans to launch several new residential projects. Housing projects will comprise a larger portion of income starting in 2015, after the acquisition of KLAND. Rental income and zinc oxide are expected to provide a reliable income of Bt1,200 million and Bt1,000 million per year, respectively.
UV’s operating margin, as measured by operating income before depreciation and amortization as a percentage of sales, was 13%-14% during 2012 through the first nine months of 2014. Its operating margin was lower than most leading property developers. UV’s profitability is expected to improve to around 15% once GOLD’s and KLAND’s higher-margin housing projects start to comprise a larger portion of UV’s total revenue. UV’s debt to capitalization ratio was 49% as of December 2013 and 51% as of September 2014. UV’s financial leverage is expected to be slightly higher than the current level over the next three years as the company plans to expand its residential property portfolio. However, the debt to capitalization ratio should not exceed 55%. UV plans to sublease two office buildings, Park Venture Ecoplex and Sathorn Square, to the Real Estate Investment Trust (REIT). Cash from the REIT transaction will partly alleviate the debt financing. UV’s cash flow protection has deteriorated as its debt level rose. The funds from operations (FFO) to total debt ratio weakened to 4% in 2013 through the first nine months of 2014 (annualized with trailing 12 months). Going forward, this ratio is expected to improve to around 10% once the revenue contributions from GOLD and KLAND increase.
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