TRIS Rating has affirmed the company rating of M.K. Real Estate Development PLC (MK) at “BBB+”, and has revised downward MK’s rating outlook to “negative” from “stable”. The rating action follows MK’s announcement on 15 June 2015 that the Tangmatitham family, the former major shareholders and the key managers of MK, sold their stake in MK. The “negative” outlook reflects concerns over the smoothness of the transition to the new major shareholders and the new management team during the current slowdown in the residential property development industry. In addition, the new management team has an unproven track record in the industry.
The rating continues to reflect MK’s long track record in the middle-income segment of the residential property development market, its ability to keep construction costs at competitive levels, and its strong capital base. The rating also takes into consideration MK’s relatively small revenue base, the cyclical nature of the property development industry, and the current slowdown in the domestic economy.
The “negative” outlook reflects the concerns over the change in MK’s major shareholders and key managers. The unproven track record of the new management team in the residential property development industry has also raised concerns over the smoothness of the transition during the current industry slowdown. The rating/outlook could be revised upward if the new management team makes significant improvements in MK’s operating performance and maintains its conservative financial policy. Any significant deterioration in operating performance or financial performance, such as a higher-than-expected rise in leverage, will negatively affect its rating/outlook.
The Tangmatitham family sold its 20.64% stake in MK to Castle Peak Developments Limited and CPD Holding Ltd. at a price of Bt6.75 per share, for a total value of approximately Bt1,200 million. Castle Peak Developments Limited and CPD Holding Ltd are 100% owned by Mr. Suthep Wongvorazathe, who is currently Executive Chairman of KT ZMICO Securities Co., Ltd. He is also a director of other companies. After the transaction, Castle Peak Developments Limited and CPD Holding Ltd hold 12.15% and 8.49%, respectively, of MK. The Tangmatitham family’s stake in MK is reduced to 5.80% from 26.44%. All members of the Tangmatitham family resigned as directors and managers of MK. Mr. Suthep Wongvorazathe was appointed as Chairman of the Board; Mr. Philipvira Bunnag and Mrs. Sutida Suriyodorn were appointed as Executive Directors. The new top management team is in place but not all positions have been filled. Although the middle and lower management ranks have not changed, the new top management team has an unproven track record in the residential property development industry. The unproven track record has raised concerns over the smoothness of the transition amid the current slowdown in the industry.
MK’s financial performance deteriorated in the first quarter of 2015. Revenue rose slightly, climbing 3.1% year-on-year (y-o-y) to Bt435 million, but the gross profit margin dropped to 33.4%, from 40.7% in 2014. The decline resulted from higher revenue from townhouses, which typically yield a lower gross profit margin than single detached houses or SDHs. In addition, some nearly-completed projects offered special discounts and promotions. As a result, the operating profit margin decreased to 11.1% in the first quarter of 2015, from 24% in 2014. The debt to capitalization ratio increased slightly to 21.3% at the end of March 2015. MK’s liquidity profile weakened in the first quarter of 2015, but remained acceptable. The funds from operations (FFO) to total debt ratio decreased to 30.7% from 36.9% in 2014. The earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage ratio fell to 2.9 times from 12.1 times in 2014.
Company Rating: BBB+ Rating Outlook: Negative
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