TRIS Rating has assigned the rating of “A’’ to the proposed issue of up to Bt2,500 million in senior unsecured debentures of Hemaraj Land and Development PLC (HEMRAJ). At the same time, TRIS Rating has affirmed the company rating and the existing senior unsecured debenture ratings of HEMRAJ at “A”. The outlook remains “developing”. The proceeds from the new debentures will be used to refinance and fund expansion plans. The “A” ratings continue to reflect HEMRAJ’s proven record in industrial estate development, its healthy profitability, and the predictable cash flows it receives from utility sales and from its investments in power projects. These strengths are offset in part by the volatile nature of the industrial property market. The current slowdown in the Thai economy and the fragile recovery in the global economy, are rating concerns. The “developing” outlook reflects the uncertainty of HEMRAJ’s credit profile. A change in HEMRAJ’s major shareholders may affect HEMRAJ’s business policies and its financial profile. A rating confirmation would be likely if HEMRAJ can maintain its business strengths and maintain its ability to generate reliable cash flows despite the change in its shareholders. A downgrade could occur, should the change lead to a deterioration in HEMRAJ’s business profile or its debt serviceability. If WHA Corporation PLC (WHA) becomes HEMRAJ’s major shareholder, the rating of WHA, the parent company, will have an influence on HEMRAJ’s ratings.
HEMRAJ is one of the leading industrial estate developers in Thailand. It was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1992. As of September 2014, the Horrungruang family held 15.01% of HEMRAJ’s shares. In addition to selling industrial land and utilities services, the company has invested in power projects. From 2011 through the first nine months of 2014, sales from industrial land and properties accounted for 60%-70% of the company’s annual revenue. Recurring income, mainly from utilities services and rental income, comprised 30%-40% of total revenue.
HEMRAJ owns and operates seven industrial estates in Thailand. Its estates are located in Rayong, Chonburi, and Saraburi provinces with a total gross area of 44,643 rai. Of the 636 customers in HEMRAJ’s estates as of September 2014, 34% were in the automotive industry and 14% were in the consumer products industry. HEMRAJ had 11,157 rai of land available for sale, as of September 2014. Of the total saleable area, 79% was located in Rayong province.
The industrial land sales were adversely affected by the slowdown in the industrial and investment activities in Thailand. According to a report from CB Richard Ellis (CBRE), total industrial land sales in Thailand declined to only 961 rai in the first nine months of 2014, compared with 3,401 rai sold in the same period of 2013. HEMRAJ’s land sales followed the industry trend. The company sold 522 rai of industrial land in the first nine months of 2014, down from 1,978 rai in the first nine months of 2013. Land sales fell because of a slowdown in manufacturing activities. Automobile production, which proved to be one of the key drivers for industrial land demand, plunged by 27.0% over the same period of the prior year (year-on-year or y-o-y) during the first nine months of 2014. However, HEMRAJ’s average market share, in terms of land sold, remained healthy. Its market share averaged at 27% of total industrial land sold in Thailand during 2009-2013 while the other leader accounted for 28% of land sold during the same period. For the first nine months of 2014, HEMRAJ was marked as the top seller of industrial land, selling 54% of all industrial land sold, according to the CBRE report.
HEMRAJ’s recurring income continued to grow despite the economic slowdown. In the first three quarters of 2014, income from the sales of utilities services, which accounted for two-thirds of total recurring income, continued to increase by 9.7% y-o-y to Bt1,288 million. Rental income from industrial property fell by 16.8% y-o-y in the first nine months of 2014 because HEMRAJ sold 150,117 square meters (sq.m.) of ready built factories (RBF) to Hemaraj Industrial Property and Leasehold Fund (HPF) in December 2013. Demand for RBFs and warehouses weakened because of the sluggish economy. Total recurring income, including utility sales, rental office space, rental income from industrial property, and pipe-rack rental fees, increased by 4.5% y-o-y to Bt1,998 million in the first nine months of 2014.
HEMRAJ’s total revenue declined by 18.5% y-o-y to Bt5,150 million in the first nine months of 2014. However, earnings before interest, tax, depreciation, and amortization (EBITDA) rose by 11.9% y-o-y to Bt3,563 million in the first nine months of 2014. The increase in EBITDA was the result of the rising contribution of recurring income. The contribution from HEMRAJ’s power project joint ventures was another factor boosting its EBITDA in the first nine months of 2014. The power project investments contributed equity income of Bt1,300 million in the first nine months of 2014, excluding an unrealized gain from foreign exchange. In the first nine months of 2014, more than half of HEMRAJ’s EBITDA came from the recurring income plus the income HEMRAJ earned from its power projects. This healthy income structure provided a cushion against the volatile nature of industrial land sales.
HEMRAJ’s leverage is moderate. The total debt to capitalization ratio was 49.7% at the end of September 2014, compared with 49.3% in 2012, despite HEMRAJ’s ongoing expansion efforts. Its liquidity profile remains good. HEMRAJ had a cash balance of Bt2,191 million as of September 2014. EBITDA interest coverage ratio was 6.2-6.8 times in 2012 through the the first nine months of 2014. The funds from operations (FFO) to total debt ratio was satisfactory at 17.3% (annualized from the trailing 12 months) in the first three quarters of 2014. HEMRAJ plans capital expenditures of about Bt4,000 million per year. Most of its investment needs can be funded mostly from its operating cash flow, since EBITDA is forecasted at Bt3,500-Bt4,500 million per year.
Despite the current slowdown in economic activity in Thailand, the prospect for industrial estates remains intact. Given the desirable geographical location and relatively more developed infrastructure, Thailand remains an attractive location as a manufacturing base for a number of industries, especially the auto industry, which requires an established supply chain. In 2014, nine major auto makers have been approved for BOI (Board of Investment) investment privileges for their planned ECO car production. The approved projects value at Bt92,406 million and will add production capacity of 1.37 million cars per year. The new capacity will lead to the expansion of auto parts suppliers subsequently.
On 17 November 2014, WHA, a provider of built-to-suit warehouses and factories for rent, announced its intention to make voluntary tender offer for HEMRAJ. The tender offer will be subject to certain requirements, including approval from WHA’s shareholders, WHA’s fund-raising plans, and the success of the tender offer itself. WHA may cancel the tender offer if the offer is not accepted by more than 50% of HEMRAJ’s shareholders. On 5 February 2015, WHA’s shareholders approved the tender offer and WHA’s capital increase plan. WHA also secured loan facilities from a financial institution to finance HEMRAJ’s acquisition. The tender offer for HEMRAJ is expected to proceed in March 2015.
Company Rating: A Issue Ratings: HEMRAJ16OA: Bt1,500 million senior unsecured debentures due 2016 A HEMRAJ217A: Bt2,000 million senior unsecured debentures due 2021 A HEMRAJ231A: Bt2,500 million senior unsecured debentures due 2023 A HEMRAJ244A: Bt2,500 million senior unsecured debentures due 2024 A Up to Bt2,500 million senior unsecured debentures due within 2025 A Rating Outlook: Developing TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2015, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating-information/rating-criteria.html.