TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt2,000 million in senior unsecured debentures of AP (Thailand) PLC (AP). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of AP at “A-”. The outlook remains “stable”. The company plans to use the proceeds from the new debentures to repay debentures maturing in January 2015 and for business expansion. The ratings reflect AP’s proven track record in the residential property development industry, strong business profile, diverse range of products, and high backlog which secures a portion of its future revenues. These strengths are partially offset by the cyclical nature of the property development industry, pressures from rising construction and administrative costs, and AP’s moderate use of financial leverage. The “stable” outlook reflects the expectation that AP will remain competitive in its core business franchise and will consistently be able to rebalance its product portfolio as the market changes. The outlook is also based on the expectation that AP will continue to follow prudent financial policies and keep its debt to capitalization ratio at 50%-55% in the medium term.
AP was established in 1990 by Mr. Anuphong Assavabhokhin and Mr. Pichet Vipavasuphakorn, who together owned approximately 30% of the company as of June 2014. In 2013, AP’s revenue stood at Bt19.9 billion, ranking it the fourth-largest property developer listed on the Stock Exchange of Thailand (SET), in terms of revenue. AP’s revenue grew at a compound annual growth rate (CAGR) of 15% in the past five years, with average presales of Bt17 billion per year. In the first nine months of 2014, AP generated presales of Bt10.2 billion. In addition, the company also had Bt7.3 billion of presales generated from four condominium projects that AP is jointly developing with MEC Thailand Investment Pte. Ltd. (MTI), a subsidiary of Mitsubishi Estate Co., Ltd. (MEC), a Japanese firm. AP held a 51% stake of the joint venture (JV) while MTI held 49%.
AP’s products cover almost all key segments in the residential property market which have unit price at over Bt1 million. Each product segment has generated strong presales and AP has captured a respectable market share in each of these segments. The company’s track record is particularly strong in the middle- to high-end townhouse and condominium segments. AP offers its products primarily within the Greater Bangkok area.
AP’s financial profile during the past 12 months was in line with TRIS Rating’s expectations. TRIS Rating’s base-case expects AP’s revenue growing by 5%-10% per annum over the next three years. Revenue will range from Bt19-Bt22 billion per annum. The downside risk on AP’s revenue is limited given the company’s sizable condominium backlog. As of September 2014, the value of the condominium backlog stood at Bt13.8 billion. Its condominium backlog is expected to be recognized as revenue of around Bt2,500 million in 2014, Bt7,500 million in 2015, and Bt3,500 million in 2016.
During 2014-2016, TRIS Rating expects AP’s operating margin (operating income before depreciation and amortization, as a % of revenue) to hold at 11%-13%. The operating margin will remain under pressure because construction costs and land costs are rising. AP will also incur higher marketing and administrative expenses to drive its growth. AP has set a target of 1 times for its net debt to equity ratio. At the end of September 2014, the ratio was 0.9 times. Under TRIS Rating’s base-case, AP’s debt to capitalization ratio (including 51% debt from JV) is expected to stay around 50%-55% over the next three years, or the net debt to equity ratio of around 1-1.2 times.
AP’s liquidity profile is acceptable. For the next three years, TRIS Rating expects the company’s funds from operations (FFO) will be Bt1.8-Bt2 billion per annum. The FFO to total debt ratio is expected to stay above 10% (based on the trailing 12 months), while the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio is expected to stay above 3 times. At the end of September 2014, AP had Bt1,003 million in cash on hand plus undrawn long-term credit lines of Bt13.3 billion. Over the next 12 months, long-term debts of Bt2.8 billion will mature. AP typically matches the maturities of its short-term debts with the cash it expects to receive from transferring finished condominiums to its customers. AP plans to refinance most of the maturing bonds with new bond issues. The maturing bonds are backed up by AP’s undrawn bank credit lines. Working capital for real estate inventories is expected about Bt3 billion per annum during 2014-2016. AP has a policy to pay no more than 50% of net profits as a dividend, or around Bt500-Bt600 million per annum. TRIS Rating views that AP’s current level of funding is sufficient to support its planned investments and dividend payments.
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