TRIS Rating has affirmed the company rating of Pre-Built PLC (PREB) at “BBB-” with “stable” outlook. The rating reflects the company’s acceptable track record of constructing high-rise building, steady profitability, and acceptable financial profile. These strengths are partially offset by the high concentration risk in the end-markets PREB serves, the cyclicality of the engineering and construction (E&C) industry, stiff competition, and a potential rise in leverage.
The “stable” outlook reflects the expectation that PREB will sustain its competitive edge in its core business. Leverage is expected to rise, but remain manageable, despite PREB’s plan to develop more residential property projects over the next three years. The operating margin should stay around 8% and the total debt to capitalization ratio will stay below 55%, or debt to equity ratio will be lower than 1.2 times during 2015-2018.
The rating and/or outlook could be upgraded, should the company build a track record of success in the property development segment. If successful, PREB will enlarge the base of revenue and boost its profitability. In contrast, the rating and/or outlook could be lowered if the company loses its competitive position. A downgrade would also be possible if revenue and profitability decline or if execution failure in the residential property projects causes the debt level to rise and capital structure to deteriorate.
Established in 1995, PREB is a general contractor focusing on constructing high-rise buildings for private sector clients. PREB was listed on the Stock Exchange of Thailand (SET) in 2005. The Charoentra family, the founding shareholder, holds the majority of PREB’s shares, owning 26% as of May 2015. The company has expanded into the production and distribution of construction materials in 2004, through its wholly-owned subsidiary, PCM Construction Material Co., Ltd. (PCM). PCM produces precast concrete. In 2009, PREB widened its scope of business to property development. PREB set up Built Land Co., Ltd., a property developer which develops condominium and townhouse projects. Since 2010, Built Land has completed one townhouse project and four condominium projects.
The rating reflects PREB’s acceptable track record of undertaking residential and commercial high-rise building projects. PREB is positioned to capture reputable property developers, most of which are SET-listed developers. PREB constructs condominium projects, chiefly in Bangkok and in prime areas outside the metropolitan. In addition, PREB can construct industrial plants and public works (infrastructure) as well as undertake system and design works. PREB’s decision to widen its scope of business into construction materials and property development was designed to broaden its revenue base and raise its profit margin. The revenue contributions from the two new lines of business remain small, but have gradually increased over the past few years. The construction segment still accounts for the majority of revenue, representing 80%-90% of total revenues during each of the past five years.
The rating also recognizes PREB’s steady profitability despite a tough competitive environment. PREB uses pre-cast concrete system technology. By using this technology, PREB can better control construction costs and project timelines, two crucial factors for success. PREB’s gross margin has held at around 10%-12% over the past several years. The gross margin rose to 13.5% for the first nine months of 2015, notwithstanding a year-on-year (y-o-y) decline in revenue. The gross margin in the construction segment improved to 12.2%. The gross profit margin in the property development segment, which is higher than the construction segment, enhanced the overall gross profit margin of the company.
Conversely, PREB is highly reliant on a few large customers. For the past three years, PREB’s revenue was predominantly derived from three clients: a Pra Dhammakaya-related foundation, a group of subsidiaries of Quality Houses PLC (QH), and Ananda Development PLC (ANAN). Each client accounted for 20%-30% of total revenue each year. Such customer concentration risk puts pressure on the rating. However, the risk is somewhat alleviated by the acceptable payment risks of PREB’s major customers.
The rating also takes into consideration PREB’s acceptable financial profile. The debt to capitalization ratio was around 9% during 2012-2013. The ratio rose to around 28% at the end of 2014 and 31% as of September 2015. The debt to capitalization ratio increased in light of PREB’s investment in its largest condominium project, TEMPO Grand Sathorn-Wuttakard. PREB’s leverage is at an acceptable level, given the company’s ample liquidity and conservative financial policies.
On the other hand, the rating is constrained by the cyclicality and stiff competition in the engineering and construction (E&C) industry, which remain downside risks for the company’s revenues and profits. PREB’s revenue contracted by 36.4% y-o-y during the first nine months of 2015, below TRIS Rating’s forecast. Revenue was reported at Bt3.05 billion in the first nine months of 2015. As of September 2015, PREB’s backlog stood at Bt7.8 billion. The total value of the current projects in the backlog will be realized 25% of PREB’s revenues during 2015, 85% in 2016, 50% in 2017, and 20% in 2018, according to TRIS Rating’s base-case forecast.
TRIS Rating expects PREB’s total revenue to be Bt4-Bt4.5 billion in 2015. During 2016-2018, total revenue is expected to edge up to Bt6-Bt7 billion each year, taking into account the transfer of the completed condominium units in the TEMPO Grand Sathorn Wuttakard project. PREB’s operating margin is expected to rise from 5%-6% to around 8% during 2016-2018. Funds from operations (FFO) is also expected to increase, climbing from Bt200-Bt300 million yearly in 2014-2015 to around Bt450 million per annum during 2016-2018. The company’s financial leverage is expected to be heightened in consideration of its property development project expansion. Leverage should stay manageable. The debt to capitalization ratio is expected to stay below 55% over the next three years. Cash flow protection, as measured by the FFO to total debt ratio and the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio, are expected to weaken. During 2015-2018, the FFO to total debt ratio will stay at around 25% on average, while the EBITDA interest coverage ratio will be around 7 times.
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