TRIS Rating has affirmed the company rating of Syntec Construction PLC (SYNTEC) at “BBB-”. At the same time, TRIS Rating has revised SYNTEC’s rating outlook to “positive” from “stable” to reflect the steady improvement in its operating performance and financial profile. SYNTEC’s credit rating reflects its proven record of constructing high-rise buildings and its medium-sized backlog. The rating also takes into consideration the cyclicality of the engineering and construction (E&C) industry, high concentration risk in the end-markets SYNTEC serves, and its moderate level of leverage.
The “positive” outlook reflects TRIS Rating’s expectation that SYNTEC’s operating performance and financial profile will continue to improve. Construction costs are seen manageable in a low material price environment. In addition, the company’s investments in serviced apartments are not expected to raise the debt to capitalization ratio above 40%, or raise the interest-bearing debt to equity ratio above 0.7 times.
SYNTEC’s credit rating could be upgraded if the company can maintain its competitive position and operating performance in the construction segment. The success of the rental property segment is expected to improve SYNTEC’s profitability and stabilize its revenues in the long term.
SYNTEC’s credit downside scenario could materialize if its financial profile deteriorates significantly, possibly due to cost overruns or overinvestment.
SYNTEC, established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1993, is a general contractor, specializing in the construction of high-rise buildings for private sector clients. Aside from its core construction business, the company, through its majority-owned subsidiaries, has expanded into commercial property as its diversification strategy in an effort to earn recurring income. In late 2013, it acquired the 20-year lease rights of Natural Ville Residence, a serviced apartment located on Langsuan road in Bangkok. SYNTEC is also developing three serviced apartments on green-field sites in Chonburi and Prachinburi provinces. The first project, Citadines Grand Central Sriracha, was launched in the first quarter of 2015. The remaining projects are under development. Still, revenue from the construction business constitutes the majority, of which about 80% is made up by condominium projects. SYNTEC’s revenue has ranged from Bt5,000-Bt7,000 million over the past three years. The company, as is common with other E&C companies, is susceptible to the cyclicality of the E&C industry. The industry cycles are mainly derived from the property market. A high degree of fluctuation in the demand for residential properties could affect the sustainability of SYNTEC’s revenue streams.
SYNTEC’s moderate business profile reflects its track record of constructing residential and commercial high-rise buildings mainly in the Bangkok area. Most of its clients are property developers listed on the SET, with acceptable credit profiles. SYNTEC is highly reliant on the condominium projects of some clients. For the past three years, the company’s biggest client has been Supalai PLC (SPALI), which contributed over one-fourth of its revenue annually. SYNTEC’s largest project has made up 10%-15% of its revenue. However, the customer concentration risk is offset by the acceptable payment risks of SYNTEC’s reliable customers. The company can attract and retain its customers, which purchase services repeatedly.
SYNTEC’s backlog currently stands at approximately Bt10 billion, a record high. Its backlog steadily increased from Bt7.5 billion in 2014 and Bt6.2 billion in 2013. The sizable backlog, boosted by medium-to-high-end condominium projects, secures about 80% of the company’s expected revenue in 2015 and 50% in 2016.
SYNTEC’s operations have recovered since 2013. Its operating margin (operating profit before depreciation and amortization as a percentage of revenue) has steadily improved. The company faced cost overruns on some projects as a consequence of the floods in late 2011 and the minimum wage hike policy in April 2012. The company’s operating margin was 5.5% in 2013, 9.3% in 2014, and rose to 10.6% in the first half of 2015.
SYNTEC has a fairly conservative financial policy, as evidenced by its moderate leverage level and ample liquidity. The company has maintained a sizable amount of liquid assets, such as cash and marketable securities. It closely monitors the working capital requirements of each project. The debt to capitalization ratio has ranged from 20%-30% over the past three years. At the end of June 2015, the debt to capitalization ratio stood at 23.5%. Cash flow protection, as measured by the FFO (funds from operations) to total debt ratio and the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio, has improved. The FFO to total debt ratio increased to 74.4% (annualize, based on the trailing 12 months) in the first half of 2015, versus 70.5% in 2014. The EBITDA interest coverage ratio rose to 18.1 times in the first half of 2015, compared with 13.8 times in 2014.
During 2015-2018, TRIS Rating expects SYNTEC’s revenue will range from Bt7,000-Bt8,000 million per annum, including the rental income from its serviced apartments. The amount of rental income from two serviced apartment projects is expected to be nearly Bt150 million in 2015, rising to more than Bt300 million by 2018 when all of the projects are completed. SYNTEC’s operating margin should range from 7%-10%, driving FFO to Bt400-Bt600 million per annum. SYNTEC plans capital expenditures of Bt400-Bt800 million per annum. Most of the funds will go to the serviced apartment projects. The debt to capitalization ratio is likely to rise, but should stay below 40%. Cash flow protection is expected to weaken while the serviced apartments are under construction. However, cash flow protection should improve after all of the projects are completed. The FFO to total debt ratio should not be lower than 20%, while the EBITDA interest coverage ratio is expected to be above 5 times for the next three years.
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