TRIS Rating has assigned the rating of “A-” to the proposed issue in senior unsecured debentures of CH. Karnchang PLC (CK), following an increase in the issue size to Bt4,500 million from the original Bt4,000 million. At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of CK at “A-”. The outlook remains “stable”. The Bt500 million increase will have no impact on the previously assigned ratings of CK. CK plans to use the proceeds from the new debentures to repay maturing debts and to fund its expansion plans. CK’s credit ratings reflect the company’s leading position in Thailand’s engineering and construction (E&C) industry, its proven record of completing infrastructure projects and specialized construction projects, as well as the synergy and financial flexibility the company gains from its strategic investments. These strengths are partially offset by the cyclical nature of the E&C industry, the inherent risk of fixed-price contracts, and the company’s high financial leverage.
The “stable” outlook reflects expectations that CK will remain highly competitive in securing new projects and will be able to sustain its operating margins above 7% on average. The company’s working capital for the Xayaburi project is also expected to improve over time.
The credit upsides are the case that CK could generate stronger-than-expected cash flows and backlog, as well as maintain its debt to capitalization ratio below 60% for sustained periods. The credit downsides are significant cost overruns for major projects or unexpected sizable cross financial supports or investments between CK and its associates that exert pressures on CK’s cash flows.
Established in 1972 by the Trivisvavet family, CK is one of the three largest E&C companies listed on the Stock Exchange of Thailand (SET). The company’s construction experience ranges from general civil work to highly sophisticated projects. CK’s strategic investment portfolio includes four SET-listed companies: Bangkok Expressway PLC (BECL), Bangkok Metro PLC (BMCL), TTW PLC (TTW), and CK Power PLC (CKP), as well as a non SET-listed company: Xayaburi Power Co., Ltd. (XPCL).
This year CK Group has undertaken major business restructuring including the merger between BECL and BMCL, and the selling of XPCL shares held by CK to CKP. In January 2015, CK’s board approved the support to the amalgamation between BECL and BMCL and the purchase of 10% of BMCL’s shares from BECL for Bt3.67 billion. After the transaction, CK is expected to hold about 30% in the newly merged company between BECL and BMCL. In June 2015, CK sold its 30% stake in XPCL to CKP for Bt4.3 billion. Thus, going forward, CKP will take the responsibility of injecting equity into XPCL until the Xayaburi project completes.
TRIS Rating views that in the short term, both transactions should have minimal impacts on CK’s net cash flows as cash received will be mostly offset by cash payments. CK’s capital structure is expected to improve from gain on sale of XPCL’s shares of around Bt1,600 million. In the medium to long term, the amalgamation of BECL and BMCL, as well as the sale of XPCL to CKP are expected to improve the realignment of growth prospects and funding alternatives between CK and its associates. The new group structure should help mitigate TRIS Rating’s concern over leverage pressure on CK.
CK’s backlog at the end of March 2015 was about Bt87 billion. Major projects in the backlog included Xayaburi dam project worth Bt38 billion, the Purple-line train project contract 4 worth Bt15 billion, Si-Rat Outer Ring Road expressway project worth Bt13 billion, and the Green-line train project contract 1 worth Bt5 billion. The Xayaburi project accounted for 44% of the total backlog.
CK’s financial profile for the past 12 months ending March 2015 was in line with TRIS Rating’s expectation, except the leverage level, which remains slightly higher than expectation due largely to high working capital financing for the Xayaburi project. TRIS Rating’s base-case expects CK to generate at least Bt32 billion in revenue per annum during 2015-2017, of which revenues from the Xayaburi project are expected at Bt8-Bt10 billion per annum, or 25%-30% of the base-case revenues. CK’s strong backlog secures about 85%, 66%, and 40% of the base-case revenues in 2015, 2016, and 2017, respectively.
CK’s operating margins during 2015-2017 are expected to stay at least above 7% on average. Funds from operations (FFO) are expected at least Bt2.5 billion per annum. The expected FFO should be adequate to finance capital expenditures at about Bt1 billion per annum and annual dividend payments at about Bt300-Bt500 million. TRIS Rating views CK’s leverage level, which is higher than average contractors with the same rating, as consistent with CK’s credit rating taken into consideration the company’s business model as a contractor and an investment company. At the end of March 2015, CK’s debt to capitalization ratio was 71.2%. CK’s debt to capitalization ratio is expected to remain elevated during 2015-2016 and improve to stay below 67% after 2017 when the Purple-line contract 4 completes.
CK’s liquidity profile is acceptable. The profile is also enhanced by the company’s financial flexibility through its investments in SET-listed companies. At the end of March 2015, the fair value of CK’s investments in four SET-listed companies was Bt29.6 billion, about 62% of the company’s total debts. During 2015-2017, the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratios are expected to stay above 2.5 times. The FFO to total debt ratios are expected to stay about 5%-10% on average.
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