TRIS Rating has affirmed the company rating of Sino-Thai Engineering & Construction PLC (STEC) at “A-” with “stable” outlook. The rating reflects STEC’s leading market position as one of Thailand’s top three construction contractors, very strong financial profile, large and fairly diversified backlog, and lengthy track record of clients in both private and public sectors. However, these strengths are partially offset by concern over political instability, which heightens risk across the industry. Political instability may cause delays in the launching of new public projects. Moreover, STEC’s strengths are tempered by the volatile and cyclical nature of the engineering and construction (E&C) industry. The “stable” outlook reflects TRIS Rating’s expectation that STEC will continue its cost control practices. The company is expected to maintain its financial strength to contend the risk from rising construction costs, and/or cost overruns from project delays, and other unforeseen event risks.
Credit upside is in the case that STEC could generate higher-than-expected revenues and operating cash flows. The downside risk is limited over the next 12-18 months, considering the government’s infrastructure investment plans, low pressure on material costs, and the company’s sizable backlog.
STEC was established in 1962 by the Charnvirakul family, and listed on the Stock Exchange of Thailand (SET) in 1992. It is the leading construction contractor in Thailand, with strong market positions in both the private and public sector customer segments.
STEC is ranked as a class 1 licensed contractor for all government authorities and state enterprises. It is one of the few prequalified construction contractors which is able to bid for large public works projects. Based on its proven track record and the strong support from a number of financial institutions, STEC has a good chance to win bids for several upcoming infrastructure projects. The company is also known for its specialization in constructing power plants and petrochemical plants, plus its ability to undertake piping and steel structure fabrication work.
In the first nine months of 2014, 51% of STEC’s total revenues were generated by public works, and the rest by private ones. Classified by end-market served, revenues from infrastructure projects contributed half of the company’s total revenues, followed by those from building projects (25%), energy projects (19%), and industrial projects (7%). The revenue contribution is varied from time to time.
As of September 2014, STEC’s backlog stood at Bt40 billion, down by 24% from Bt52.7 billion as of December 2013. The fall was due to a drop in STEC’s new contracts signed over the first nine months of 2014. This was in line with a contraction in both private and public investments. The backlog should rise to about Bt48.5 billion at the end of 2014, when taking into account large amounts of new contracts signed in the final quarter of 2014. The Bt48.5 billion backlog largely secures about 70% of the company’s expected revenues of about Bt21-Bt24 billion per annum over the next three years.
In December 2014, STEC offered the lowest bid for the MRT Green Line (Morchit-Saphanmai-Kukot) - contract 3 and 4, totally worth Bt6.9 billion. The contracts are likely to be signed in the second quarter of 2015. They were not included in the Bt48.5 billion backlog.
STEC’s financial profiles during 2013 through the first nine months of 2014 were in line with TRIS Rating’s expectations. They remained healthy due to the company’s strong profitability, low level of financial leverage, and robust liquidity position.
STEC’s operating margin (operating profit before depreciation and amortization as a percentage of revenue) increased to 8.8% in 2013, and 9.6% in the first nine months of 2014, compared with a three-year average of 7.9%. The total debt to capitalization ratio stood at merely 2.9% at the end of September 2014. Cash flow protection was solid, which reflected by high levels of both the FFO (funds from operations) to total debt ratio and the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio. The FFO to total debt ratio was 809.6% (annualized, based on the trailing 12 months), while the EBITDA interest coverage ratio was 109.8 times in the first nine months of 2014. The company benefits from its low need for capital expenditures and modest working capital requirements. STEC’s working capital needs are supported in part by advance payments from project owners and the credit of suppliers.
During 2014 through 2017, TRIS Rating expects STEC’s revenues will range from Bt21-Bt24 billion per annum. The operating margin should stay at 7%-9%, which means FFO will range from Bt1.5-Bt1.9 billion per annum. The current rating already takes into account a possible rise in its financial leverage due to an investment in a property development project. Thanks to its net cash position, the company still has more headroom for its future investments. Even if it makes more debt-funded investments in the future, the debt to capitalization ratio is expected to stay below 30%. Cash flow protection is likely to deteriorate slightly regarding the expected increase in its gearing. However, STEC’s liquidity profile should remain healthy, and consistent with the current rating.
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