TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt4,000 million in three-year senior unsecured debentures of Quality Houses PLC (QH). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of QH at “A-”. The outlook remains “stable”. The new issue rating replaces the issue rating previously assigned on 3 February 2015, following QH’s request to increase the issue size to up to Bt4,000 million, from Bt3,000 million. The company will use the proceeds from the new debenture issue to repay some of its existing loans. QH’s ratings reflect the company’s established track record in the property development industry, strong position in the middle- to high-income segment of the housing market, and the financial flexibility from its investments in marketable securities. The strengths are partially offset by the cyclical nature of the property development industry and its relatively high level of financial leverage. The “stable” outlook reflects the expectation that QH’s business profile will remain strong in the medium term. The company’s debt to capitalization ratio is expected to stay below 60% for the next three years. QH’s ratings and/or outlook could be revised downward should the company’s financial profile deteriorates dramatically. For example, a prolonged market slump, leading to lower sales, would push the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio below 2 times and push the debt to capitalization ratio above 60% on a sustainable basis. On the contrary, the ratings could be revised upward if the company can maintain its operating performance at the current levels while lowering its debt to capitalization ratio to around 50% on a sustainable basis.
QH was founded in 1983 and is one of the leading property developers in Thailand. As of September 2014, QH’s major shareholders were Land and Houses PLC (LH, owning a 25% stake) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH’s business profile is strong. It has been one of the top five property developers, base on revenue, listed on the Stock Exchange of Thailand (SET) in the past five years. QH has a strong market position, particularly in the segment of single-detached houses (SDH) priced over Bt5 million per unit. Over the past few years, the company has also delivered an acceptable performance in the segments with lower-priced housing units, such as Bt1-Bt3 million per unit. The company’s housing brands are well-recognized and accepted by buyers.
QH’s financial profile improved during the past 12 months, matching TRIS Rating’s base-case scenario. Profitability was better than expected. Revenue in the first nine months of 2014 stood at Bt16.2 billion, up 9% compared with the first nine months of 2013, driven by growth in the low-priced housing segment and more transfers of finished condominiums to customers. At the end of September 2014, QH’s backlog of condominium units was worth Bt6.8 billion. The condominium units in the backlog are expected to be transferred during 2015-2016, producing Bt3.0-Bt3.5 billion in revenue each year. QH’s operating margin (operating income before depreciation and amortization as a percentage of revenue) in the first nine months of 2014 was 16%, equal to the same period of 2013. The total debt to capitalization ratio at the end of September 2014 was 58%, increasing from 54% at the end of 2013. However, presales in the first nine months of 2014 stood at Bt14.2 billion, down 14% from the same period a year ago. The company launched only one small SDH project in the first quarter of 2014 amid concerns over the domestic political turmoil.
During 2015-2017, TRIS Rating’s base-case scenario expects QH to generate revenues of around Bt20 billion per annum. Revenues from low-rise housing projects should account for 60%-70% of total revenues. The operating margin is expected to remain stable. The total debt to capitalization ratio is expected to stay below 60%, taking into account the company’s plan to launch new real estate development projects worth approximately Bt20 billion per annum.
QH’s liquidity profile remains acceptable. At the end of September 2014, QH’s long-term debts, mostly debentures maturing within the next 12 months, were around Bt4.6 billion. Most of the debts are expected to be refinanced with new debentures. QH’s liquidity sources include Bt1.7 billion in cash and Bt8.9 billion in undrawn long-term credit facilities as at the end of September 2014. Funds from operations (FFO) is expected to hold around Bt2 billion per annum. The company’s liquidity position is enhanced by its sizeable portfolio of marketable securities. The portfolio carried a fair value of Bt30.2 billion at the end of September 2014.
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