TRIS Rating has affirmed the company rating of Land & Houses PLC (LH) and the ratings of LH’s senior unsecured debentures at “A+” with “stable” outlook. The ratings reflect LH’s leading position in the residential property development market, strong brand franchise, and proven operational track record. The ratings also take into consideration the financial flexibility derived from LH’s portfolio of income-generating assets and marketable securities. However, the ratings are partially constrained by the cyclical and competitive nature of the property development industry, plus concerns over the current slowdown in the domestic economy and the high level of household debts.
The “stable” outlook reflects the expectation that LH will maintain its strong operating performance, acceptable financial position, and competitive position. Over the next three years, LH’s revenue is expected to range from Bt25,000-Bt30,000 million per annum. The interest-bearing debt to equity ratio should be kept below 1 times.
LH’s ratings and/or outlook could be revised downward, should its operating performance or financial position significantly deteriorate from the current levels. The ratings and/or outlook could be revised upward should its capital structure improve significantly from the current level and its operating performance remains strong comparable with its listed peers.
LH is one of Thailand’s leading property developers. The company’s total assets as of June 2015 stood at Bt90,000 million, making LH the largest residential property developer listed on the Stock Exchange of Thailand (SET) in terms of asset size. Its revenue was Bt28,317 million in 2014 and Bt11,581 million in the first half of 2015, ranking LH as one of the three largest listed property developers based on revenue. As of May 2015, the Asavabhokhin family held 31% of the company’s shares, followed by the Government of Singapore Investment Corporation (GIC) at 16%. LH’s core products are single detached houses (SDH), which contributed 70%-75% of total revenue over the past five years. LH’s very strong business profile is underscored by its brand equity. LH’s products are perceived as premium residential properties in terms of product quality and after-sale service. The company offers several SDH brands across a number of price ranges. LH customizes products to suit buyers’ affordability and characteristics for each project location. LH’s presales reached Bt31,000 million in 2014, up from Bt30,000 million in 2013 and Bt25,000 million in 2012. Due to the slowdown in demand for residential property, presales during the first six months of 2015 dropped by 27% year-on-year (y-o-y) to Bt11,000 million.
As of June 2015, LH’s backlog was around Bt21,000 million. The backlog of Bt4,500 million is expected to be transferred to customers in the remainder of 2015, and the rest will be transferred during 2016-2017. TRIS Rating’s base case scenario expects LH’s revenues will range from Bt25,000 million to Bt30,000 million per annum over the next three years. LH’s operating profit margin (operating income before depreciation and amortization, as a percentage of revenue) increased to 24%-25% during 2013-2014, up from 22% in 2012. The operating profit margin decreased to 21% during the first six months of 2015. LH’s operating margin is expected to stay above 20% over the next three years, factoring in pressures from rising land costs, market competition, and overhead expenses needed to support LH’s expansion plans.
LH’s debt to capitalization ratio was 44% as of December 2014 and 45% as of June 2015, improving from 50% as of December 2013. LH’s bond covenant limits its interest-bearing debt to equity ratio at 1.5 times. At the end of June 2015, the ratio stood at 0.8 times. Despite its plan to invest in recurring-income assets, LH’s debt to capitalization ratio is expected to remain below 50%, or the interest-bearing debt to equity at around 1 times. In addition, the company plans to sell some of its assets to a real estate investment trust (REIT) once the operating performance of the assets meets the target yield. LH’s moderate leverage level is partly offset by its holdings of sound income-generating assets and a sizable portfolio of marketable securities. The fair value of LH’s investments in listed associates was Bt43,000 million as of June 2015. Equity income from its investments was around Bt2,000 million per annum during 2012-2014.
LH’s liquidity profile is acceptable. The ratio of funds from operations (FFO) to total debt ranged from 14%-17% during 2013 through the first six months of 2015. Over the next three years, TRIS Rating expects LH’s FFO to total debt ratio will stay above 10%, while the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio will stay above 5 times.
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