TRIS Rating has affirmed the company rating of Areeya Property PLC (Areeya) at “BB+” with “stable” outlook. The rating reflects the company’s acceptable track record in the middle-market segment of the residential property development industry. The rating also reflects its relatively small revenue base, volatile profitability, and high leverage. In addition, the relatively high household debt level nationwide, and the cyclical and competitive nature of the property development industry remain the rating concerns.
The “stable” outlook reflects the expectation that Areeya’s operating performance and its financial position will improve over the next two to three years. The operating margin should stay at 8%-10% and the debt to capitalization ratio should decline to below 70%. The rating and/or outlook could be revised downward if its operating performance does not improve as expected and the debt to capitalization ratio deteriorates from the current level.
Areeya was established by Laohapoonrungsee family in 2000 and listed on the Stock Exchange of Thailand (SET) in April 2004. The Laohapoonrungsee family has been the company’s major shareholders since inception, owning a 45% stake as of September 2015. Mr. Wisit Laohapoonrungsee remains Areeya’s chairman and chief executive officer (CEO). Areeya offers a wide range of residential property products including single detached houses (SDHs), semi-detached houses (semi-DHs), townhouses, and condominiums. Its products target the middle-market segment. As of September 2015, Areeya had 40 active projects. The value of the unsold units across all of its active projects was about Bt13,000 million. Almost a half of the value was in condominium projects, 33% was in townhouse projects, and 18% was in SDH projects. Areeya’s backlog stood at Bt3,450 million as of September 2015. Most of the units in the backlog are condominiums.
From 2012 through 2014, Areeya’s revenue ranged from Bt1,700-Bt2,400 million per year, smaller than most of TRIS Rating’s rated developers. The company derives most of its revenue from townhouses as townhouses account for Bt1,400-Bt2,100 million in revenue annually. Areeya recorded revenue of Bt2,438 million in 2014. Revenue surged in the first nine months of 2015 to Bt4,048 million, more than double the Bt1,514 million sold in the same period of the previous year. Revenue increased considerably from all of the products in the product line, particularly low-rise projects. Moreover, the company sold 50 rai of raw land and recorded revenue of about Bt1,200 million in the first nine months of 2015. Revenue in 2015 is expected to be above Bt5,000 million. Areeya’s revenue stream during the remainder of 2015 through 2018 is partly secured by its backlog. The units in the backlog will be converted into revenue of about Bt1,140 million in the last quarter of 2015, Bt1,500 million in 2016, and Bt810 million during 2017-2018.
Areeya’s financial performance deteriorated during the past few years as its profitability declined. Operating profit before depreciation and amortization as percentage of sales (the operating margin) has fallen from a peak of about 21% in 2009 to below 10% since 2011. The drop was mainly due to a significant decrease in revenue, but a steady increase in selling, general, and administrative expenses. The gross margin (excluding the raw land sales) fell to 25.5% in the first nine months of 2015, from a normal level of above 30%. Areeya attempted to reduce its inventory by offering sales promotions and low-priced housing units for its projects in new locations. The development costs of projects in new locations were higher than normal because Areeya firstly had to build facilities and set attractive prices. However, non-recurring revenue from land sales boosted revenue in the first nine months of 2015, cutting the ratio of selling, general, and administrative expenses as a percentage of sales. As a result, the operating margin increased to 9.6% in the first nine months of 2015, compared with 5% in 2014. Going forward, Areeya’s profitability is expected to improve. The operating margin should rise to about 10%-12% over the next three years.
Areeya’s leverage is high, and has grown steadily. It expanded aggressively during the past few years and recognized less revenue. As of September 2015, the debt to capitalization ratio stood at 74.1% (including capitalized annual leases), compared with 63.8% in 2012. The interest-bearing debt to equity ratio was 2.8 times, rising from 1.6 times in 2012, since a number of condominium projects were under construction. Most of the units in the condominium projects launched during the past few years are scheduled for customer transfers in late 2015 onwards, and hence should reduce Areeya’s leverage. However, Areeya plans to launch two high-end condominium projects, worth about Bt12,000 million in total, in 2016. As a consequence, the debt to capitalization ratio should stay high at 70%-75% (including capitalized annual leases) over the next three years.
Cash flow protection deteriorated during the past few years as profits fell and leverage rose. The ratio of funds from operations (FFO) to total debt fell steadily, sliding from 2.53% in 2012 to 0.20% in 2014. The FFO to total debt ratio improved slightly to 2.78% (annualized, from the trailing 12 months) in the first nine months of 2015. As of September 2015, the company had a high level of short-term debt, mostly bills of exchange (B/E), raising concerns over the company’s liquidity. However, Areeya had undrawn committed facilities worth around Bt2,000 million to support its liquidity needs. Cash on hand was just Bt144 million.
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