TRIS Rating has affirmed the company and the senior unsecured debenture ratings of SC Asset Corporation PLC (SC) at “BBB+” with “stable” outlook. The ratings reflect SC’s acceptable track record in the middle- to high-end segments of the residential property market, reliable cash flow streams from the rental property segment, and steadily growing revenues. These strengths are partially offset by SC’s relatively high financial leverage and declining operating profit margin after the proportion of income from rental property segment declined. The ratings also take into consideration the cyclical and competitive nature of the property development industry, plus concerns over the relatively high household debt level amid the current slowdown in the domestic economy.
The “stable” outlook reflects the expectation that SC will maintain its competitive position and financial profile in the medium term. The operating margin is expected to stay around 15% over the next three years. The fund from operation (FFO) to total debt ratio should not be lower than 10%, while the debt to capitalization ratio is expected to stay in a range of 50%-60%. The company’s ratings and/or outlook could be lowered if its profitability deteriorates further or if the total debt to capitalization ratio rises above 60% for a sustained period. The ratings and/or outlook could be revised upward should the FFO to total debt ratio improve to around 15% and the total debt to capitalization ratio stay at 50%-55% on a sustainable basis.
SC is a property developer established in 1989. The Shinawatra family took over the company in 1995 and entered the rental property segment by developing Shinawatra Tower 3. In 2003, SC reorganized in order to focus on developing residential property. The company was listed on the Stock Exchange of Thailand (SET) in 2003. The Shinawatra family continues to be the company’s major shareholders, with a 60% stake as of May 2015. SC offers a number of residential property products, including single detached houses (SDH), townhouses (TH), home offices, and condominiums.
SC’s existing residential property products target middle- to high-income customers, with an average price of Bt7.5 million per unit at the end of June 2015. As of June 2015, SC had 33 active projects. The value of the remaining unsold units in 33 projects was around Bt24 billion. The company’s backlog was worth around Bt9.2 billion. The units in the backlog will be delivered to customers during 2015-2018. During 2014 through the first half of 2015, revenues from SDH and TH segments accounted for 55% of total revenue, while revenues from condominium and rental property segments contributed around 38% and 7%, respectively.
SC’s presales in 2014 was Bt8,542 million, dropping by 37% from 2013. The drop in presales was due to the fewer launches of new projects in 2014 amid the concern over political turmoil in Bangkok and vicinities in the first half of 2014 and the slowdown in domestic economy. Presales in the first half of 2015 was Bt5,930 million, a rise of 71% from the same period last year. TRIS Rating expects SC’s presales will range from Bt11,000-Bt14,000 million per year during 2015-2018.
SC’s total revenue in 2014 was Bt12,601 million, up 26% from Bt10,031 million in 2013. Revenue from residential property sales increased to Bt11,750 million in 2014, from Bt9,201 million in 2013, while income from rental business held steady at around Bt800 million per year. During the first half of 2015, total revenue was Bt5,913 million, up 37% year-on-year (y-o-y). Sales of SDH units continued to be the major driver of SC’s revenues. Under TRIS Rating’s base case scenario, SC’s total revenue is expected to range from Bt12,000-Bt15,000 million per annum during 2015-2018. SC should continue launching new projects worth around Bt15,000-Bt20,000 million annually.
SC’s profitability has been moderate. The gross profit margin has remained high, at about 37% of total revenue during 2012 through the first half of 2015. The operating margin, measured as operating income before depreciation and amortization as a percentage of revenue, slightly decreased to 16.3% in the first half of 2015, compared with 16.9% in 2014. Despite the declining construction costs, the operating margin is not expected to improve much from the current level. Land costs are rising and SC must spend more on marketing and administrative expenses in order to stimulate demand during the current slowdown in the domestic economy. However, TRIS Rating expects that SC’s operating margin should not be lower than 15% during the next three years. The company is expected to realize more revenues from the condominium projects launched during the past few years.
SC’s leverage has increased continuously over the past few years since condominium projects now comprise a large portion of its project portfolio and the company has several condominium projects under construction. As of June 2015, the total debt to capitalization ratio rose to 55.1%, from 54% in 2014. The FFO to total debt ratio in the first half of 2015 (annualized, from the trailing 12 months) was 13.1%, a slight increase from 12.8% in 2014. The company finances its investments in land and its construction costs with project loans from banks and with bonds. However, the proportion of bank loans is declining overtime. As the result, the ratio of secured debt to total assets has stayed below 20%. The ratings of SC’s senior unsecured debentures are now equal to its company rating.
SC’s liquidity is considered adequate. At the end of June 2015, the company had Bt868 million of cash on hand and Bt3,639 million of undrawn committed credit facilities. SC will have Bt3,475 million in debts due over the next 12 months. Around 83% of the amount due are loans from financial institutions while 17% are bond redemptions. The company plans to repay its bank loans with the cash it expects to receive from transferring completed units in the backlog to customers. SC plans to refinance most of the maturing bonds with new bonds.
SC191A: Bt1,300 million senior unsecured debentures due 2019 BBB+ Rating Outlook: Stable
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