TRIS Rating has affirmed the company rating of Charn Issara Development PLC (CI) at “BBB-” with “stable” outlook. The rating reflects the company’s acceptable track record in middle- to high-end condominium segment and the recurring income it earns from its hotels and from renting commercial office space. These strengths are partly offset by the company’s relatively small revenue base, fluctuating operating performance, and relatively high leverage. The rating also takes into consideration the cyclical and competitive nature of the property development industry and the current slowdown in the domestic economy.
The “stable” outlook reflects the expectation that CI will be able to sustain its financial position during 2015-2017. The company is expected to deliver the units in its backlog on schedule. The adjusted debt to capitalization ratio should not significantly rise higher than 65%. The credit rating or outlook upside is limited over the next 12-18 months due to CI’s financial leverage which is expected to remain high. On the contrary, the rating and/or outlook could be revised downward should CI’s operating performance and its financial leverage significantly deteriorate from the current level.
CI is a small property developer in Thailand. The company was established in 1989 and listed on the Stock Exchange of Thailand (SET) in 2002. The Issara family has been the company’s major shareholder since its inception. As of March 2015, the family held a 47% stake in the company. CI offers various types of residential property projects including condominiums, residential villas, single detached houses (SDH), and townhouses. Its products mainly target the middle- to high-end market segments. Its residential projects are located in Bangkok and in provinces which are popular tourist destinations. CI had 10 active projects as of March 2015. The value of the remaining unsold units in these projects was approximately Bt5,500 million. Nearly 85% of the remaining unsold value was in condominium projects, with the rest in residential villa, SDH, and townhouse projects. CI now has a backlog worth Bt3,500 million. Almost all of the units in its backlog are scheduled to be transferred to customers during 2015-2016.
Apart from its residential property projects, CI started developing a luxury boutique hotel in Phuket named Sripanwa in 2006. Sripanwa is a premium quality project and has received a very favorable response from customers. In addition, the on-site hotel helps increase the value of the residential villas offered for sale inside the Sripanwa project. In 2013, CI sold the Sripanwa hotel to the Sri Panwa Hotel Property Fund (SPWPF), then leased back the hotel from the Fund. CI has a 15-year lease contract to operate the hotel. CI purchased 30% of SPWPF at the time the Fund was created. CI also earns recurring rental and service income of Bt80-Bt90 million per annum from renting the commercial space in two Bangkok office buildings, Charn Issara Tower I and Charn Issara Tower II.
CI’s financial profile during 2014 through the first quarter of 2015 was lower than TRIS Rating’s expectations due mainly to the delay in residential units transferred. Revenue in 2014 was Bt1,593 million, lower than the target of Bt2,000 million. Most of revenues came from the transfer of the condominium units in its backlog in the “The Issara Ladprao” and the “Baan Thew Talay 1” projects. Revenue in the first quarter of 2015 was Bt592 million, mainly from the “Baan Thew Talay 1” project. CI’s operating profit margin was 21.2% in the first quarter of 2015 and 10.6% in 2014, up from -8.7% in 2013. CI has a high level of leverage. The adjusted debt to capitalization ratio, considering the operating lease of the Sripanwa hotel as a debt obligation, ranged from 53% to 67% during 2010-2014. As of March 2015, the adjusted debt to capitalization ratio was 62%. CI’s financial leverage is expected to remain high during 2015-2017, as it plans to launch several new residential property projects.
Due to the relatively low operating profit margin and rising debt level, CI’s cash flow protection, the funds from operations (FFO) to total debt ratio dropped to -1.1% in 2014, down from 20% in 2013 and 15% in 2012. The FFO to total debt ratio was 15% in 2012 after the transfer of “The Issara Ladprao”. The cash CI received from selling the Sripanwa hotel to SPWPF in August 2013 caused the FFO to total debt ratio to improve to 20%. The drop in FFO to total debt ratio in 2014 was due to delays in transferring completed residential units to customers. The FFO to total debt ratio is expected to improve gradually over the next two to three years after the company starts transferring units in its backlog.
During 2015-2017, TRIS Rating’s base-case expects CI should generate revenue in a range of Bt2,500-Bt3,500 million per annum. The operating margin is expected to stay at around 12%-15%. Since the company has several projects under construction, the adjusted debt to capitalization ratio is expected to stay around 60%-65%.
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