TRIS Rating has assigned a rating of “BBB-” to the proposed issue of up to Bt1,500 million in senior unsecured debentures of Nawarat Patanakarn PLC (NWR). At the same time, TRIS Rating has affirmed the company rating and the current senior unsecured debenture ratings of NWR at “BBB-”. The outlook remains “stable”. The company will use the proceeds from the new debentures to repay some of its existing loans and for business expansion. NWR’s ratings reflect the company’s acceptable track record of undertaking construction projects for the public sector and the private sector, and moderate project backlog. These strengths are partially offset by the cyclical nature of the engineering and construction (E&C) industry, moderate fluctuations in NWR’s operating performance, and the execution risk NWR faces from its new property development projects.
The “stable” outlook reflects the expectation that NWR will continue to maintain its competitive position in civil engineer work, for both public and private sector projects. The debt to capitalization ratio is expected to stay below 60%, or the interest-bearing debt to equity ratio below 1.5 times during 2015-2017. Its operating margin is expected to improve to around 8%-9%.
However, a significant loss in its business which causes its operating margin to drop below 7% or pushes the funds from operations (FFO) to total debt ratio lower than 10%, NWR’s rating and/or outlook would be revised downward as a result. In addition, the company rating would be affected if heavy investment in the property development sector causes its leverage to rise higher than 60%. The credit upsides are limited over the next 12-18 months since the company is in the early stage of expanding into the property development industry. Thus, leverage is expected to rise but returns from the property development segment are still uncertain. NWR’s success in the property development segment will be a positive factor for its ratings and/or outlook.
NWR was founded in 1976 and listed on the Stock Exchange of Thailand (SET) in 1995. As of January 2015, NWR’s major shareholder was Mr. Polpat Karnasuta, holding about 10% of the total shares. NWR is a general contractor, focusing on civil engineering work for buildings, transportation infrastructure, ports, irrigation works, tunnels, and pipe jacking projects.
NWR’s moderate business risk profile reflects its acceptable track record in project executions and completions. During 2009-2014, revenue from projects for private sector clients comprised about 60% of total revenues per year; while public sector projects comprised 40%. During 2009-2011, NWR’s revenue average Bt4,000 million per annum. While during 2012-2014, revenue increased to around Bt7,000 million per annum.
At the end of March 2015, NWR’s project backlog stood at Bt12,325 million. The major projects in the backlog included the coal excavation project at Mae Moh mine worth Bt3,572 million, the waste water treatment management project worth Bt2,085 million, and the flood tunnel for the Bang Sue canal project worth Bt1,464 million. The value of the three largest projects in the backlog was Bt7,121 million, accounting for 58% of the total backlog. The total value of the current projects in the backlog will be realized as 38% of NWR’s backlog in 2015, 34% in 2016, and 17% in 2017.
NWR’s ratings reflect the company’s short track record of developing residential property projects. NWR invested 40% in a joint venture with Charn Issara Development PLC (CI) to develop “The Issara Ladprao” condominium project, worth Bt1,867 million in 2006 and the "ISSI Condominium Suksawat", worth Bt2,000 million, in 2013. In addition, NWR invested 25% in a joint venture with VSPN Property Co., Ltd. to develop “Seabreeze Villa Pattaya” project, worth Bt500 million in 2007. In 2012, the company developed and constructed single-detached houses (SDH) projects, under “Baranee” brand. In 2015, the company plans to launch two SDH projects and one low-rise condominium project, with the combined value of around Bt2,300 million.
NWR’s financial profile during the past 12 months was lower than TRIS Rating’s expectations. The operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first quarter of 2015 was 5.3%, decreasing from 7.7% in 2014. The debt to capitalization ratio at the end of March 2015 was 42.3%, increasing from 41.4% in 2014. TRIS Rating’s base-case expects NWR’s total revenues to stay in the range of Bt7,000-Bt8,000 million per annum during 2015-2017. The revenue contribution from the property development is expected at least Bt600 million per annum. The downside risk on the revenue is moderate, as the company’s backlog has secured about half of TRIS Rating’s base-case revenues. The operating margin is expected to improve gradually from 6%-8% to stay above 8% during 2015-2017, due to higher gross profit margins from property development projects. NWR’s debt to capitalization ratio is expected to stay in a range of 45%-55% during 2015-2017. FFO are expected to be around Bt600-Bt800 million per annum. The FFO to total debt ratio is expected to stay above 15%, while the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio is expected to stay at least above 4 times.
Company Rating: BBB- Issue Ratings: NWR178A: Bt1,500 million senior unsecured debentures due 2017 BBB- Up to Bt1,500 million senior unsecured debentures due within 2018 BBB- Rating Outlook: Stable
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