TRIS Rating has affirmed the company rating of Noble Development PLC (NOBLE) at “BBB” and has also affirmed the ratings of NOBLE’s senior unsecured debentures at “BBB-”. At the same time, TRIS Rating has revised downward NOBLE’s rating outlook to “negative” from “stable”. The negative outlook reflects NOBLE’s lower-than-expected operating performance and higher financial leverage. NOBLE’s operating performance missed the target because presales were very low in a new low-rise housing project and because it cancelled two condominium projects. Its large investment in the Noble Ploenchit project and several condominium projects under construction also made NOBLE’s financial profile further deteriorate from expectation.
The ratings continue to reflect NOBLE’s well-accepted brand name in the middle- to high-end segment of the condominium market, as well as its product differentiation strategy and its large backlog which partly secures its future revenue stream. These strengths are partially offset by NOBLE’s business concentration risk caused by the huge investment in a single large condominium project, Noble Ploenchit. The Noble Ploenchit project is valued at Bt18,000 million or around 40% of NOBLE’s total project portfolio. The ratings are constrained by the cyclical and competitive nature of the property development industry, plus concerns over a slowdown in the domestic economy and a high level of household debt nationwide.
The “negative” outlook reflects NOBLE’s lower-than-expected operating performance and its relatively high financial leverage. The ratings could be downgraded if the company could not deliver its large backlog as scheduled, causing its operating performance and financial position to decline below expectations. The outlook could be revised back to “stable” should NOBLE’s operating performance improve and if the debt to capitalization ratio does not exceed 65% from 2017 onwards. The credit upside is unlikely in the near term.
NOBLE is a medium-sized property developer in Thailand. The company was established in 1991 and listed on the Stock Exchange of Thailand (SET) in 1996. NOBLE primarily develops condominium projects, with selling prices ranging from Bt120,000 to Bt230,000 per square metre (sq.m.). NOBLE also offers other types of residential products including single detached houses (SDH), townhouses, and land plots. The company offers unique designs for each of its product types. The unique designs differentiate its products from other developers’ projects. As of September 2015, NOBLE had 16 active projects with units available for sale. Condominium projects comprised around 80% of the value of its project portfolio, while the rest was low-rise housing projects. The value of the remaining unsold units (including built and un-built units) was Bt13,850 million. The total backlog was valued at Bt19,980 million. Around half of the backlog comes from the Noble Ploenchit project. Units in this project will be transferred to buyers in late 2016. Very few of the backlog is scheduled to be delivered during the remainder of 2015.
NOBLE’s presales in 2014 was Bt5,136 million, a 27% year-on-year (y-o-y) drop. Presales during the first nine months of 2015 declined by 45% y-o-y to Bt2,461 million. Total revenue in 2014 decreased by 26% y-o-y to Bt2,276 million as fewer residential units were transferred to customers. Revenue during the first half of 2015 was only Bt135 million, shrinking from Bt1,604 million during the same period of 2014. The significant drop in revenue in 2015 came because NOBLE did not complete any condominium projects this year and a new pre-built housing project, Noble Gable, generated slow presales. As a result, revenue in 2015 is expected to fall below Bt300 million. However, revenue during the next three years is expected to be at least Bt5,000 million per annum, supported by the large backlog.
NOBLE’s gross profit margin remained high. The gross margin ranged from 38%-42% of total revenue during 2010 through the first six months of 2015. The operating profit margin (as measured by operating income before depreciation and amortization as a percentage of sales) declined to 14% in 2014 and -191% during the first half of 2015, compared with 18%-21% annually during 2011-2013. The drop in the operating profit margin was due mainly to lower revenue and high selling, general and administration (SG&A) expenses. Over the next three years, NOBLE’s operating profit margin is expected to rise to at least 25% of total revenue once large amount of backlog will be recognized from late 2016 onwards.
Total debt of NOBLE was Bt12,435 million as of June 2015, up from Bt11,417 million as of December 2014 and Bt9,796 million as of December 2013. At the end of June 2015, the total debt to capitalization ratio was relatively high at 76%. The net interest-bearing debt to equity ratio was 2.9 times. NOBLE’s financial leverage is expected to rise during the rest of 2015 through 2016 as the company is building several condominium projects at the same time, but no condominium project will be completed until the last quarter of 2016. NOBLE received approval from its bondholders to waive the financial covenant during 2015 and 2016. Under TRIS Rating’s base case forecast, NOBLE’s debt to capitalization ratio must stay below 65% in order to satisfy the current credit ratings assuming NOBLE transfers the finished units in the Noble Ploenchit project on schedule.
Due to the rise in financial leverage, NOBLE’s fund from operation (FFO) to total debt ratio has decreased continuously. The ratio was 1.7% in 2014 and -3.2% (annualized with trailing 12 months) during the first six months of 2015, down from 4% in 2013 and 5.4% in 2012. However, NOBLE’s liquidity is still acceptable. It had enough source of liquidity, including Bt917 million in cash on hand, Bt250 million in marketable securities, and around Bt4,800 million in undrawn unconditional project loans as of June 2015. The company also required customers to make down payments of 15%-30% of the selling price. NOBLE has around Bt2,000 million in debt due in the next 12 months.
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