TRIS Rating has assigned the company rating of Loxley PLC (LOXLEY) at “BBB+” with “stable” outlook. The rating reflects LOXLEY’s diverse range of businesses and long-established relationships with its clients and suppliers. The rating also incorporates the sustained cash flow from sizable dividends received from its profit-making associate companies. Conversely, the rating is tempered by LOXLEY’s relatively low profitability and the volatility of its revenue stream, which is largely project-based revenue.
The “stable” outlook reflects the expectation that LOXLEY can sustain its competitive position as it bids for projects and continues to show a sustainable level of project-based revenue. In addition, the company will continue to benefit from its diverse range of businesses and obtain considerable returns from its profitable associate companies. A rating upgrade is unlikely over the next 12-18 months but could occur if LOXLEY could significantly improve its profit margin and if its recent investments show notable payoffs. In contrast, downward rating pressure would emerge should LOXLEY experience a steep downturn in revenue, a further drop in profitability, or a material decline in amount of dividends it receives.
LOXLEY’s business profile is satisfactory, underpinned by its diverse sources of revenue from multiple lines of business, which help mitigate fluctuation in revenue. LOXLEY, a conglomerate founded in 1939, and its wholly-owned and majority-owned subsidiaries, provide a wide range of products and services, primarily in three segments: (1) technology, (2) trading, and (3) service. LOXLEY, as an operating holding company, has also made investment in several associate companies and joint ventures. The several associate companies and joint ventures further widen LOXLEY’s scope of operations to cover lines of business such as the production and distribution of lubricants, industrial coated and pre-painted steel, optical fiber cables, solar power plants, and more.
In its technology segment, LOXLEY, mainly through Loxley Wireless PLC and Loxbit Group, provides a range of information and communication technology (ICT) products and services. LOXLEY’s product line in this segment covers telecommunications networks and services, automatic banking machines and innovative solution, and information technology (IT) solutions services. The technology segment also offers power related business, broadcasting, waste water management, installation of railway signaling system, expressway system, transportation system, business communication system as well as service and sales of hi-speed printing products. In the trading segment, LOXLEY acts as distributor of well-known consumer product brands through its 50%-owned subsidiary, Loxley Trading Co., Ltd. In addition, LOXLEY distributes industrial chemical, automotive products, and construction materials. In the service segment, LOXLEY provides total security solution in both aviation and non-aviation industries where the key source of revenue comes from the Suvarnabhumi airport.
The rating also incorporates LOXLEY’s long-term relationships with clients and suppliers. The company also has a well-established market presence, particularly in the government sector, backed by its track record of completed projects in several government departments. LOXLEY has expert and experienced management team and personnel. The company’s employees are well-trained and capable of delivering high quality products and services across a range of industries. In addition, the high level of technical skill of LOXLEY's staff creates innovations and new business opportunities despite the high overhead cost of employing a large number of technical staff. These strengths enable LOXLEY to repeatedly win the biddings for several government projects.
LOXLEY earns a sizable amount of dividends from its profit-making associate companies. The key associate companies stem from LOXLEY’s partnership with BP PLC, one of the world’s largest oil and gas companies, and BlueScope Steel Ltd., a leading steelmaker headquartered in Australia. The dividends are a stable, sustainable source of cash flow for LOXLEY since the associate companies have strong market presence and healthy financial performances.
At the opposite end, the rating is constrained by LOXLEY’s relatively low profitability and the volatility of its revenue stream. LOXLEY’s performance predominantly derives from project-based revenue, particularly in the technology segment. LOXLEY is mainly reliant on projects originated by the government and state enterprises. The margin for a typical project is quite low, owing to the stiff competition. Most of the government projects are awarded through competitive biddings. LOXLEY’s revenue thus hinges on government budgets and the initiations of new projects. The projects carry a minimal amount of payment risk, but have relatively low profit margins. The projects sometimes face delays or cancellation, which increase the volatility of LOXLEY’s revenue stream. In addition, LOXLEY, as with its rivals in the ICT industry, must contend with fast-moving technological changes, hence some of its products or services might become outdated in a period of time.
The technology segment accounts for the majority of LOXLEY’s revenue. On average, technology segment represented nearly 70% of total revenue over the past three years. In response to the volatility arising from project-based revenue and profit, LOXLEY is striving to create sources of income. Currently, the recurring revenue is derived from the trading and the service segments, which contributed between 32%-36% of total revenue in each of the past three years.
The company’s revenue rose from Bt10,281 million in 2010 to range between Bt14,000-15,000 million during 2011-2014. The increase was mainly from the technology segment, and the ICT business in particular, due to the installation of a new 3G (three generation) network service. However, in the first half of 2015, revenue contracted by 18% year-on-year (y-o-y) to Bt5,040 million, owing to delays of some government-sponsored projects. LOXLEY’s operating profit margin is low. During 2010-2014, the company broke even or posted an operating profit margin of 1%-2% because of its high overhead. In the first half of 2015, LOXLEY recorded an operating loss of 3.2%, as revenue slumped.
LOXLEY’s leverage is considered moderate. As most of the company’s debts are project financing debts, leverage is generally elevated in the wake of acquiring project contracts. Total debt increased from Bt2,318 million in 2010 to Bt4,767 million in 2012, then declined to Bt2,666 million in 2014. As a result, total debt to capitalization ratio improved to 29.4% at the end of 2014. At the end of June 2015, total debt stood at Bt3,132 million, and total debt to capitalization ratio rose to 33.4%. During 2015-2018, LOXLEY plans to invest around Bt180 million per annum, keeping total debt to capitalization ratio below 30%.
The company has acceptable liquidity, buoyed by the dividends it receives from its major associate companies. Funds from operations (FFO), as adjusted by subtracting the company’s share of profit of investments in associate companies and adding the cash dividends it receives, declined from Bt300-Bt400 million during 2010-2011 to Bt247 million in 2012, then increased to around Bt700 million in 2013-2014. LOXLEY obtains a substantial amount of dividends from two successful associate companies, BP-Castrol (Thailand) Ltd. and NS BlueScope (Thailand) Ltd. These two investments have been lucrative for LOXLEY. In aggregate, dividends from these two companies comprised more than 80% of the dividends LOXLEY received over the past three years. FFO to total debt ratio decreased from around 14% in 2010 and 2011 to 5.2% in 2012, then improved to 20% in 2013 and 26.9% in 2014. Earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio improved from 1.2 times in 2010 to approximately 4.5 times during 2011-2014. For the first half of 2015, the company reported FFO of Bt99 million. FFO to total debt ratio and EBITDA interest coverage ratio stood at 19.9% (annualized from the trailing 12 months) and 3 times, respectively. As of June 2015, the company had cash on hand of Bt512 million and marketable securities worth Bt566 million. The company has undrawn credit facilities of around Bt1,678 million, with long-term debt repayment obligations of around Bt135 million during the next 12 months. As of June 2015, the company’s outstanding short-term obligations were Bt2,052 million, parts of which were project finance facilities of Bt1,200 million.
TRIS Rating expects LOXLEY’s revenue in 2015 will plunge by 15% from the previous year due to slow government projects. Subsequently, the company will incur an operating loss. FFO to total debt ratio will fall to 10% while EBITDA interest coverage ratio will stay at around 3 times. During 2016-2018, revenue is expected to increase and range between Bt14,000-Bt17,000 million. LOXLEY’s operating profit margin is forecasted to stay low at around 1%-2%. The company is expected to receive Bt500-Bt600 million per annum in dividends from its investments. TRIS Rating estimates that LOXLEY’s FFO to total debt ratio will recover to 20% and EBITDA interest coverage ratio will exceed 5 times.
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