TRIS Rating has affirmed the company and senior unsecured debenture ratings of Italian-Thai Development PLC (ITD) at “BBB-” with “stable” outlook. The ratings reflect the company’s well-established presence in the domestic engineering and construction (E&C) industry, its proven record of undertaking projects from both public and private sector clients, large and diverse project backlogs, broad range of end markets served, and geographic diversification. However, the strengths are partially offset by weakening profitability, a debt-heavy capital structure, execution risks from future long-term investment projects, and the cyclicality of the E&C industry.
The “stable” outlook embeds our expectation that ITD will continue to secure sizable projects, maintain its strong market presence in the midst of tough environment, and manage to uplift its profitability. Moreover, ITD is capable of further strengthening its capital structure, allowing the company to carry out long-term projects while sustaining debt to capitalization ratio well below 70%, or debt to equity lower than 2.3 times during 2015-2018.
The rating upgrade is unlikely over the next 12-18 months as ITD’s financial profile is relatively weak. Downward rating pressure could develop in the wake of a further diminishing profitability, and if the company is aggressively pursuing debt-financed investment which will cause its debt to capitalization ratio to exceed 70% for a sustained period.
ITD’s business profile is strong, as evidenced by its long and well-established market presence among the top-tier and largest E&C contractors in the country. The company is the largest SET-listed E&C contractor by revenue. ITD’s revenue in 2014 stood at Bt48 billion, and Bt23.9 billion in the first half of 2015. ITD’s business profile is supported by its extensive track record of undertaking both public and private projects. Because of its experience and resources, ITD provides a complete range of construction and engineering works. ITD undertakes E&C projects across the country, spreading out industry served with diverse customers. These strengths help alleviate concentration risks stemming from customers, products, and geography.
Apart from its core E&C business in the domestic market, ITD is diversifying its revenue base by expanding abroad and exploring new business opportunities. Revenue from aboard has been derived predominantly from E&C projects in India through a majority-owned subsidiary. ITD also has five long-term investment projects: a potash mining in Thailand, an industrial estate in Myanmar, a toll road in Bangladesh, a bauxite mine and alumina plant in the Lao People's Democratic Republic (Lao PDR), and a railway and port concession in Mozambique. However, these projects take time to develop and have not made any contributions to the company.
The ratings are undermined by weakened profitability in ITD’s projects both domestic and abroad. The company reported declining profits in the past year. Operating profit was weighed down by a hefty interest burden. ITD further reported a loss in the first half of 2015. The ratings are also constrained by the company’s highly leveraged capital structure. ITD has incurred an extensive amount of debt to fund its investment projects and its working capital requirements. The large amount of debt has resulted in a huge interest burden and a weaker financial structure. In pursuit of its diversification goals, ITD is largely exposed to execution risks, primarily from country risk and regulatory risks, which appear to outweigh the benefits. ITD’s overall performance is partly weighed down by unproductive assets, which hurt its profitability. Like other E&C companies, ITD is exposed to the cyclicality of the E&C industry. An industry downturn could have an impact on the sustainability of ITD’s revenue streams.
As of June 2015, ITD’s backlog stood at Bt229 billion. The backlog included a railway and port concession in Mozambique worth Bt112 billion and a toll road concession in Bangladesh worth Bt37.8 billion. The major construction work at both concessions has not yet begun. The backlog also includes the Hongsa mining in the Lao PDR, worth Bt25.2 billion, which will be realized over the next 15 years. Excluding the Mozambique concession and the Bangladesh toll road project, ITD’s backlog should secure 20%-40% of its annual revenues during 2015-2017.
ITD’s financial performance during the past 12 months was lower than TRIS Rating’s base-case scenario, albeit a 5.4% y-o-y rise in revenue in the first half of 2015. Operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first half of 2015 was 5.2%, decreasing from 8.4% in 2014. The drop was mainly from the allowance for doubtful accounts of ITD Cementation India Ltd. (ITD Cem) worth Bt621 million. The debt to capitalization ratio rose from 66.8% as of 2014 to 69% as of June 2015, due to a tight liquidity arising largely from increasing receivables from the electric train projects. FFO (funds from operations) to total debt ratio stood at a weak 8.23% as of 2014 and fell to 6.85% (annualized, based on the trailing 12 months) in the first half of 2015. The net interest bearing debt to equity ratio rose to 2.1 times as of June 2015, close to the maximum of 2.5 times set forth in a covenant of ITD’s debentures.
During 2015-2018, TRIS Rating’s base-case expects ITD’s revenues (excluding revenues from five investment projects) in a range of Bt45-Bt55 billion per annum. ITD’s operating margin is expected to be quite stable and should stay above 8% on average. The debt to capitalization is expected to stay in a range of 65%-70%, or the interest-bearing debt to equity ratio will range from 2-2.3 times. The expected leverage level reduces headroom under the interest bearing debt to equity covenant, which allows a maximum ratio of 2.5 times. ITD is expected to generate FFO at least Bt2.5 billion per annum. Capital expenditures are expected at Bt2-Bt2.5 billion per annum, except in 2015 when spending is expected to increase by Bt1 billion for the Hongsa project. The ratio of FFO to total debt is expected to stay higher than 8%. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio is expected to stay above 2 times.
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