TRIS Rating has upgraded the company and existing senior unsecured debenture ratings of CH. Karnchang PLC (CK) to “A-/stable” from “BBB+/positive”. At the same time, TRIS Rating has assigned the rating of “A-” to CK’s proposed issue of up to Bt4,000 million in senior unsecured debentures. CK plans to use the proceeds from the new debentures to repay maturing debts and for business expansion. The rating upgrades reflect CK’s stronger business platform and improved financial flexibility following successive business reorganizations, which enhance marketability of invested securities and mitigate pressure on cross financial supports.
CK’s ratings continue to reflect the company’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in infrastructure and specialized projects, as well as business synergy and financial flexibility from strategic investments. These strengths are partially offset by the cyclical nature of the E&C industry, the inherent risk of fixed-price contracts, and the company’s high financial leverage.
The credit upsides are the case that CK could generate stronger-than-expected cash flows and backlog, as well as maintain its debt to capitalization ratio below 60% for sustained periods. The credit downsides are significant cost overruns for major projects or unexpected sizable cross financial supports or investments between CK and its associates that exert pressures on CK’s cash flows.
The “stable” outlook reflects expectations that CK will remain highly competitive in securing new projects and will be able to sustain its operating margins above 7% on average. The company’s working capital for the Xayaburi project is also expected to improve over times.
Established in 1972 by the Trivisvavet family, CK is one of the three largest E&C companies listed on the Stock Exchange of Thailand (SET). The company’s construction experience ranges from general civil work to highly sophisticated projects. CK’s strategic investment portfolio includes four SET-listed companies: Bangkok Expressway PLC (BECL), Bangkok Metro PLC (BMCL), TTW PLC (TTW), and CK Power PLC (CKP), as well as a non SET-listed company: Xayaburi Power Co., Ltd. (XPCL).
CK’s backlog at the end of September 2014 was about Bt96 billion. Major projects in the backlog included Xayaburi dam project worth Bt42 billion, the Purple-line train project contract 4 worth Bt17 billion, Si-Rat Outer Ring Road expressway project worth Bt17 billion, and the Green-line train project contract 1 worth Bt6 billion. The Xayaburi project accounted for 43% of the total backlog.
In January 2015, CK’s board approved the company to engage in two major reorganization transactions. First, CK will provide support for the amalgamation between BECL and BMCL. CK will purchase 10% of BMCL’s shares from BECL for Bt3.67 billion. After the transaction, CK is expected to hold about 30% in the newly merged company between BECL and BMCL. Second, CK will sell its 30% stake in XPCL to CKP for Bt4.3 billion. After the transaction, CKP will take the responsibility of injecting equity into XPCL until the Xayaburi project completes.
TRIS Rating views that in the short term, both transactions should have minimal impacts on CK’s net cash flows as cash received will be mostly offset by cash payments. CK’s capital structure is not expected to change materially either as gain from the sale of XPCL’s shares will be offset by the reversion of unrealized gain in fair value of BECL’s shares. In the medium to long term, the amalgamation of BECL and BMCL, as well as the sale of XPCL to CKP are expected to improve the realignment of growth prospects and funding alternatives between CK and its associates. BECL’s strong cash flows should fit relatively well with BMCL’s high funding needs to capture growth in the mass transit train projects. The new group structure should help mitigation TRIS Rating’s concern over leverage pressure on CK.
CK’s operating performance for full year 2014 is expected to be in line with TRIS Rating’s expectation, except the leverage level, which remains slightly higher than expectation due largely to high working capital financing for the Xayaburi project. TRIS Rating’s base-case expects CK to generate about Bt32 billion in revenue per annum during 2015-2017, of which revenues from the Xayaburi project are expected at Bt8-Bt10 billion per annum, or 25%-30% of the base-case revenues. CK’s strong backlog secures about 85%, 66%, and 40% of the base-case revenues in 2015, 2016, and 2017, respectively.
CK’s operating margins during 2015-2017 are expected to stay at least above 7% on average. Funds from operations (FFOs) are expected at least Bt2.5 billion per annum. The expected FFOs should be adequate to finance capital expenditures at about Bt1 billion per annum and annual dividend payments at about Bt300-Bt500 million. TRIS Rating views CK’s leverage level, which is higher than average contractors with the same ratings, as consistent with CK’s credit ratings taken into consideration the company’s business model as a contractor and an investment company. At the end of September 2014, CK’s debt to capitalization ratio was 68.1%. CK’s debt to capitalization ratio is expected to remain elevated during 2015-2016 and improve to stay below 67% after 2017 when the Purple-line contract 4 completes.
CK’s liquidity profile is acceptable. The profile is also enhanced by the company’s financial flexibility through its investments in SET-listed companies. At the end of September 2014, the fair value of CK’s investments in four SET-listed companies was Bt30 billion, about 74% of the company’s total debts. During 2015-2017, the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratios are expected to stay above 2.5 times. The FFO to total debt ratios are expected to stay about 5%-10% on average.
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