TRIS Rating has assigned the rating of “A-” to the proposed issue of up to Bt5,500 million in senior unsecured debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has affirmed the company and current senior unsecured debenture ratings of CK at “A-”. The outlook remains “stable”. CK plans to use the proceeds from the new debentures to repay maturing debts and to fund its expansion plans. CK’s credit ratings reflect the company’s leading position in Thailand’s engineering and construction (E&C) industry, its proven record of completing infrastructure projects and specialized construction projects, as well as the synergy and financial flexibility the company gains from its strategic investments. These strengths are partially offset by the cyclical nature of the E&C industry, the inherent risk of fixed-price contracts, and the company’s high financial leverage.
The “stable” outlook reflects expectations that CK will remain highly competitive in securing new projects and will be able to sustain its operating margins above 6% on average. The company’s working capital for the Xayaburi project is also expected to improve over time.
The credit upsides are the case that CK could generate stronger-than-expected cash flows and backlog, as well as maintain its debt to capitalization ratio below 60% for sustained periods. The credit downsides are significant cost overruns for major projects or unexpected sizable cross financial supports or investments between CK and its associates that exert pressures on CK’s cash flows.
Established in 1972 by the Trivisvavet family, CK is one of the three largest E&C companies listed on the Stock Exchange of Thailand (SET). The company’s construction experience ranges from general civil work to highly sophisticated projects. CK’s strategic investment portfolio includes three SET-listed companies: Bangkok Expressway and Metro PLC (BEM), TTW PLC (TTW), and CK Power PLC (CKP). In 2015, CK Group has undertaken major business restructurings including the amalgamation between Bangkok Expressway PLC (BECL) and Bangkok Metro PLC (BMCL) to a new company, BEM, and the selling all of Xayaburi Power Co., Ltd. (XPCL) shares held by CK to CKP.
CK’s backlog at the end of September 2015 was about Bt92.5 billion. Major projects in the backlog included Xayaburi dam project worth Bt35.1 billion, the double track railroad project on Chira Junction through Khon Kaen Section worth Bt15.3 billion, the Purple-line train project contract 4 worth Bt11.2 billion, and Si-Rat outer ring road expressway project worth Bt8.1 billion. The Xayaburi project accounted for 38% of the total backlog.
CK’s financial profile in the first nine months of 2015 was in line with TRIS Rating’s expectation, except the leverage level, which remained higher than expectation due largely to high working capital financing for the Xayaburi project and funded debt from the Purple-line train project. TRIS Rating’s base-case expects CK to generate at least Bt32 billion in revenue per annum during 2015-2018, of which revenues from the Xayaburi project are expected at Bt8-Bt10 billion per annum, or 25%-30% of the base-case revenues. CK’s strong backlog secures about 95%, 60%, and 35% of the base-case revenues in 2016, 2017, and 2018, respectively.
CK’s operating margins (operating income before depreciation and amortization, as a percent of revenue) during 2015-2018 are expected to stay at least 6% on average. Funds from operations (FFO) are expected at least Bt1.6 billion per annum. The expected FFO should be adequate to finance capital expenditures at about Bt1 billion per annum and annual dividend payments at about Bt300-Bt500 million. TRIS Rating views CK’s leverage level, which is higher than average contractors with the same rating, as consistent with CK’s credit rating, taking into consideration the company’s business model as a contractor and an investment company. At the end of September 2015, CK’s debt to capitalization ratio was 71.4%. CK’s debt to capitalization ratio is expected to remain elevated during 2015-2016 and improve to stay below 62% after 2017 when the Purple-line contract 4 completes.
CK’s liquidity profile is acceptable. The profile is also enhanced by the company’s financial flexibility through its investments in SET-listed companies. At the end of September 2015, the fair value of CK’s investments in four SET-listed companies was Bt32 billion, about 64% of the company’s total debts. During 2015-2018, the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratios are expected to stay above 2.5 times. The FFO to total debt ratios are expected to stay about 5%-8% on average.
Company Rating: A- Issue Ratings: CK167A: Bt2,000 million senior unsecured debentures due 2016 A- CK174A: Bt2,000 million senior unsecured debentures due 2017 A- CK182A: Bt2,000 million senior unsecured debentures due 2018 A- CK187A: Bt1,000 million senior unsecured debentures due 2018 A- CK188A: Bt1,000 million senior unsecured debentures due 2018 A- CK193A: Bt4,000 million senior unsecured debentures due 2019 A- CK198A: Bt500 million senior unsecured debentures due 2019 A- CK19NA: Bt1,000 million senior unsecured debentures due 2019 A- CK205A: Bt2,500 million senior unsecured debentures due 2020 A- CK213A: Bt4,000 million senior unsecured debentures due 2021 A- CK228A: Bt3,000 million senior unsecured debentures due 2022 A- Up to Bt5,500 million senior unsecured debentures due within 2023 A- Rating Outlook: Stable
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