TRIS Rating has lowered the company and debenture ratings of Hemaraj Land and Development PLC (HEMRAJ) to “BBB+” from “A” with “stable” outlook. The ratings of HEMRAJ are revised down to reflect the creditworthiness of a group of WHA Corporation PLC (WHA), which held 92.88% interest in HEMRAJ as of 22 July 2015. HEMRAJ’s credit profile remains strong, however, according to TRIS Rating‘s Group Rating Methodology published in July 2015, HEMRAJ’s credit rating is capped by the credit profile of WHA Group.
The “BBB+” rating of WHA Group is based upon the strengthening business profile after acquiring nearly 100% interest in HEMRAJ. WHA Group’s business scope has expanded to cover industrial property development and recurring income derived from sale of utilities and predictable dividend from power projects. The rating, however, is weighed down by WHA’s aggressive funding for HEMRAJ’s acquisition, which impaired the Group’s balance sheet and financial position.
The “stable” outlook reflects the expectation that HEMRAJ can maintain its leading position in the industrial property industry. The expanding base of recurring income from the sale of utility services, power projects, and rental factories will provide a cushion for the company, despite the rising risk of a global economic slowdown. The rating upside would be likely if WHA Group’s rating is upgraded upon the success of its deleveraging plan. A downgrade could occur, should WHA Group’s financial profile deteriorate significantly or if HEMRAJ’s business platform changes in such a way that its own credit profile is substantially weakened.
HEMRAJ is one of the leading industrial estate developers in Thailand. It was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1992. WHA acquired HEMRAJ by making voluntary tender offer in March 2015. As of 22 July 2015, WHA held 92.88% of HEMRAJ’s shares. WHA is one of leading providers of built-to-suit warehouses. The company was established in 2007 by the Anantaprayoon family and listed on the SET in November 2012. The company has expanded its business scope to provide ready-built factories (RBF) for rent, offices for rent, and solar roof projects. As of June 2015, the leased area managed by WHA totaled 837,209 square meters (sq.m.), comprising 557,089 sq.m., owned by property fund and real estate investment trust (REIT) and 280,120 sq.m., owned by the company itself.
According to WHA’s management, HEMRAJ business platform remains the same even after WHA has become major shareholder. HEMRAJ owns and operates eight industrial estates in Thailand. Its estates are located in Rayong, Chonburi, and Saraburi provinces with a total gross area of 47,486 rai. Of the 656 customers in HEMRAJ’s estates as of June 2015, 35% were in the automotive industry and 14% were in the consumer products industry. HEMRAJ had 12,181 rai of land available for sale, as of June 2015. Of the total saleable area, 80% was located in Rayong province. During 2011 through 2014, sales of industrial land and property accounted for 60%-70% of the company’s revenue each year. Recurring income, mainly from utility services and rental income, comprised 30%-40% of total revenue annually.
The sales of industrial land were affected by the political turmoil in Thailand in 2014. It recovered fairly, but the industry continued to be affected by the current economic slowdown. According to a report from CB Richard Ellis (CBRE), industry-wide industrial land sales in the first three months of 2015 improved to 655 rai, up from 209 rai in the same period of 2014. However, land sales averaged 1,200-1,300 rai per quarter in 2013. HEMRAJ remained one of the top two sellers of industrial land according to CBRE’s report. HEMRAJ’s industrial land sales accounted for 28% of total market in the first quarter of 2015. For the first half of 2015, HEMRAJ sold 356 rai of industrial land in the first six months of 2015, up from 297 rai in the first six months of 2014, but lower than HEMRAJ’s average sales of 500-600 rai per quarter during 2013. Land sales remained slow because of a slowdown in manufacturing activity following the sluggish economy. Industrial capacity utilization continued to decline in 2015, slipping to 58.8% during the first seven months of 2015, from 60.4% in 2014 and 64.3% in 2013. The auto industry, which proved to be one of the key drivers for industrial land demand, produced 935,251 vehicles in the first half of 2015, almost the same production level in the same period of 2014. Auto production dropped by 23.5% in 2014 compared with 2013.
The economic slowdown affected HEMRAJ’s operating performance. HEMRAJ’s industrial land sales declined by 56.6% year-on-year (y-o-y) to Bt1,198 million in the first half of 2015. Earnings before interest, tax, depreciation, and amortization (EBITDA) fell by 22.1% over the same period the prior year to Bt2,175 million in the first half of 2015. The drop in land sales was partly offset by resilient sources of recurring income, healthy contributions from HEMRAJ’s power projects, and higher profitability of industrial land sales. Recurring income, which accounted for 56% of total revenues in the first half of 2015, grew by 14.6% y-o-y. HEMRAJ’s power projects contributed equity income of Bt808 million for the first six months of 2015, but shrank by 15% y-o-y due to the planned shutdown of the company’s GHECO-One power plant. HEMRAJ’s land sales realized a healthier gross margin of 56% in the first half of 2015, compared with 52% in the same period of 2014.
HEMRAJ’s current financial profile remains good and its capital structure was relatively stable. Total debt to capitalization ratio was at 48.0% at the end of June 2015. Debt repayment is properly managed. HEMRAJ has scheduled debt repayments of Bt2,750 million in 2016 and Bt2,400 million in 2017. The company will be able to meet its debt repayment obligations, based on its projected EBITDA of Bt4,000 million per year. The EBITDA interest coverage ratio was acceptable at 5.1 times in the first half of 2015 despite the current economic slowdown. The fund from operation (FFO) to total debt ratio was satisfactory at 16.6% (annualized from the trailing 12 months) in the first half of 2015.
After completing the acquisition of HEMRAJ in April 2015, WHA Group’s business platform now covers industrial estates, the sale of utility services, RBFs, and investment in power companies. Its customer base includes the automobile industry and the heavy industry, in addition to the fast-moving consumer goods and logistics industries. After HEMRAJ and WHA are consolidated, a combined leased area of warehouse and RBF space equals to 1,221,621 sq.m. as of June 2015. WHA Group’s revenues grew to Bt1,369 million in the second quarter of 2015, compared with Bt427 million in the first quarter of 2015. Looking forward, WHA Group’s revenue is expected to rise to Bt10,000-Bt12,000 million per year, excluding HEMRAJ’s properties sale to REITs. Revenues from sales will account for about 70%-75% of total revenues and recurring income will account for 25%-30%. HEMRAJ will contribute about half of WHA Group’s revenues and EBITDA per year.
WHA Group’s balance sheet deteriorated after acquiring HEMRAJ. Of the Bt40,564 million transaction value, WHA funded 78% with bank loans and 22% with new equity. Total debt rose to Bt57,958 million as of June 2015, from Bt10,503 million as of December 2014. WHA’s debt to capitalization rose to 77.4% as of June 2015. WHA’s consolidated debts comprised Bt11,235 million owed by WHA, Bt15,840 million owed by HEMRAJ and acquisition debt of Bt30,882 million. About 80% of the acquisition debt of Bt30,882 million will be repaid during 2015 and 2016. WHA repaid part of the acquisition debt with Bt4,000 million in dividends it received from HEMRAJ after HEMRAJ sold non-core assets worth Bt3,022 million. WHA also plans to repay acquisition debt by sales of offices for rent, RBFs and warehouses for rent to REIT in 2015 and 2016. As a wholly-owned subsidiary of WHA, HEMRAJ’s financial policies and leverage level will be managed considering group-wide financial healthiness.
Hemaraj Land and Development PLC (HEMRAJ)
Company Rating: BBB+
Issue Ratings:
HEMRAJ16OA: Bt1,500 million senior unsecured debentures due 2016 BBB+
HEMRAJ217A: Bt2,000 million senior unsecured debentures due 2021 BBB+
HEMRAJ222A: Bt1,000 million senior unsecured debentures due 2022 BBB+
HEMRAJ231A: Bt2,500 million senior unsecured debentures due 2023 BBB+
HEMRAJ244A: Bt2,500 million senior unsecured debentures due 2024 BBB+
HEMRAJ252A: Bt1,500 million senior unsecured debentures due 2025 BBB+
Rating Outlook: Stable