TRIS Rating has affirmed the company and senior unsecured debenture ratings of Nawarat Patanakarn PLC (NWR) at “BBB-” with “stable” outlook. The ratings reflect the company’s acceptable track record of undertaking construction projects for the public and private sectors, and moderate project backlog. These strengths are partially offset by heightening leverage, the cyclical nature of the engineering and construction (E&C) industry, competitive threats, and the execution risks associated with its new property development projects.
The “stable” outlook reflects the expectation that NWR will maintain its competitive position in civil engineering work, for both public and private sector projects. NWR is poised to grasp the opportunities ahead while it can manage and collect its outstanding receivables. The debt to capitalization ratio is expected to stay below 60%, or the interest-bearing debt to equity ratio below 1.5 times, during 2016-2018. The operating margin is expected to improve and stay above 8%.
NWR’s ratings and/or outlook would be revised downward as a result of a significant adverse changes which would cause the operating margin to drop below 7% or push the FFO to total debt ratio lower than 10%. In addition, the company’s ratings would be affected if large investment in the property development sector causes the debt to capitalization ratio to rise higher than 60% for a sustained period. The credit upside case is limited over the next 12-18 months since the company is expanding into the property development industry. Leverage is expected to rise while the returns from the property development segment are still uncertain. NWR’s success in the property development segment and a lessening of its debt load will be positive factors for its ratings and/or outlook.
NWR was founded in 1976 as a general contractor. The company was listed on the Stock Exchange of Thailand (SET) in 1995. As of March 2016, NWR’s major shareholder was Mr. Polpat Karnasuta, who holds about 10% of the shares outstanding. NWR provides a broad range of civil construction work including construction of buildings, factories, transportation infrastructures, ports, irrigation works, tunnels, and pipe jacking projects. NWR expanded its scope of business to property development in 2012. In 2013, NWR set up a wholly-owned property developer, Mana Patanakarn Co., Ltd. (MANA), to develop condominium and housing projects. At present, MANA has two housing projects and one condominium project under development.
The ratings take into account NWR’s moderate business risk profile, which is characterized by its acceptable track record in project executions and completions. NWR ranks sixth among the SET-listed contractors, considering revenue base and asset size. On the back of the range of construction work it can perform, NWR’s revenue has grown steadily for the past several years. Revenue grew from Bt4 billion in 2011 to Bt7.6 billion in 2015. The construction segment still accounts for the majority of the revenue, or approximately 80% of total revenue, during each of the past five years. Notwithstanding cost overruns on some construction projects, NWR improved the gross profit margin in the construction segment, boosting it from 3.9% to 5.5% over the past few years. The operating margin (operating profit before depreciation and amortization as a percentage of revenue) in 2015 was 8.4%, slightly increasing from 7.7% in 2014. NWR has a significant revenue stream from a nine-year contract of excavation and removal of earth and coal at Mae Moh mine, undertaken by its joint venture (JV).
At the end of 2015, NWR’s project backlog stood at Bt14.39 billion. The major projects in the backlog included the coal excavation project at the Mae Moh mine worth Bt2.69 billion, the Mae Moh power plant replacement project worth Bt2.03 billion, and the wastewater treatment management project worth Bt1.76 billion. The value of the three largest projects in the backlog was Bt6.49 billion, accounting for 45% of the total backlog. TRIS Rating expects that NWR should benefit substantially from the forthcoming government-sponsored transportation infrastructure projects. However, the actual implementation timelines for the projects are unknown.
NWR recently became a property developer, a strategic aimed at ramping up its revenue base. At first, NWR invested 40% in an associated company which is a JV with Charn Issara Development PLC (CI) in 2006. The associated company so far has developed two high-rise condominium projects worth nearly Bt4 billion in aggregate. In 2007, NWR took 25% of VSPN Property Co., Ltd. to develop a seaside housing project in Chonburi province. NWR entered the property development business merely as a partner until 2012 when the company developed its own residential project, a single-detached house (SDH) project under its own “Baranee” brand. Since 2013, the property development segment has developed under MANA. MANA launched two SDH projects and one low-rise condominium project, with a combined value of around Bt2.5 billion. Revenue from the property development segment remains small, but has gradually increased over the past few years. The ratings recognize NWR’s short track record of developing residential projects as NWR experienced lower-than-expected sales in an SDH project. The execution risks attached with residential property projects remain a rating concern.
The ratings are offset by the company’s heightening leverage. NWR has shouldered a much higher debt load over the past two years. The debt level rose largely to fund its working capital needs, increasing activity in the property development segment, and needed capital expenditures. NWR was hurt markedly by uncollected receivables, which afterwards saddle the company’s cash flow. NWR suffered a substantial loss of Bt174 million in 2015 after it set aside a hefty allowance for doubtful accounts amounting to Bt218 million to cover long overdue receivables. The financial profile as reported does not fully reflect NWR’s debt exposure. TRIS Rating includes the debts of NWR’s joint ventures in the rating assessment to reflect the company’s potential exposure as the JV partner and guarantor. As of 2015, NWR had Bt5 billion in consolidated debt, which included debt at the JV level on pro-rata basis, up from Bt2.4 billion at the end of 2013. The debt to capitalization ratio at the end of 2015 was 57.7%, increasing from 49.9% in 2014 and 44.1% in 2013. The rising level of debt is counterweighted by NWR’s acceptable liquidity, and bolstered by sizable balances of cash and short-term investments. The ratings are also constrained by the cyclicality in the E&C industry and stiff competition, which remain downside risks for the company’s revenues and profits.
TRIS Rating’s base-case expects NWR’s revenues to range from Bt9,000-Bt10,000 million per annum during 2016-2018. The downside risk on the revenue is moderate, as the company’s backlog has secured about 45%-75% of the revenues under TRIS Rating’s base-case expectation. The revenue contribution from the property development segment is expected to exceed Bt600 million per annum. The operating margin is expected to improve gradually from 6%-8% to stay above 8%, due to higher gross profit margins from property development projects. NWR’s debt to capitalization ratio is expected to stay in a range of 45%-55% during 2016-2018. Funds from operations (FFO) are expected to be Bt600-Bt800 million per annum. The FFO to total debt ratio is expected to stay above 15%, while the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio is expected to stay above 4 times.
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