TRIS Rating has affirmed the company rating of Property Perfect PLC (PF) at “BB+” with “stable” outlook. The rating reflects PF’s proven track record in the housing market, accepted brand name in the middle- to high-income segments, and expected higher recurring income after the acquisition of Thai Property PLC (TPROP) and its subsidiary, Grande Asset Hotels and Property PLC (GRAND), in mid-2015. These strengths are partially offset by PF’s very weak financial profile resulting from its high financial leverage, low profitability, and concerns over the diversification into several unfamiliar businesses. Its liquidity risk is partly mitigated by the higher amount of cash on hand and undrawn project loans. The rating also takes into consideration the relatively high level of household debts nationwide, coupled with the current slowdown in the domestic economy, which may impact the demand in the residential property market in the short-to-medium term.
The “stable” outlook reflects the expectation that PF will sustain its financial position during aggressive expansion. PF’s debt to capitalization ratio should stay at around 65% and its operating profit margin should be recovered to 8%-10%. Also, PF is expected to find adequate sources of funds in order to mitigate its liquidity risk.
PF’s rating and/or outlook could be revised downward if PF’s financial profile falls below the expectation. If the debt to capitalization ratio remains above 65% on sustainable basis and there is more pressure on liquidity risk, this will lead to a downward revision. On the contrary, the rating and/or outlook would be upgraded if its financial profile improves, as defined by the debt to capitalization ratio staying below 65% and the operating profit margin increasing above 10% for a sustainable period.
PF is one of the leading residential property developers in Thailand. The company was established in 1985 by Mr. Chainid Adhyanasakul and was listed on the Stock Exchange of Thailand (SET) in 1993. Currently, the company has three business segments: residential property development, hotel, and retail businesses. The residential property segment has been the largest source of revenue, accounting for 81% of total revenue in 2015. As of March 2016, PF had 58 existing residential projects, worth a total of Bt120,000 million. PF’s project portfolio consists of housing (70% of the total portfolio value) and condominium (30%) projects. The average unit price was Bt4.7 million for a housing unit and Bt3 million for a condominium unit. At the end of March 2016, PF had unsold units worth Bt37,000 million available for sale (including built and unbuilt units) and a backlog worth Bt7,000 million.
PF’s presales in 2015 decreased by 21% year-on-year (y-o-y) to Bt10,330 million. Presales during the first quarter of 2016 grew by 42% y-o-y to Bt3,200 million. PF’s total revenue was Bt11,000-Bt12,000 million per annum during 2013-2015. Revenue from housing units has remained steady at Bt6,000-Bt7,000 million per year since 2010. Revenue contribution from condominium units increased to 24%-30% of total revenue during the past three years and 37% during the first quarter of 2016. After acquiring TPROP and GRAND in mid-2015, revenue from hotel operations and rental assets comprised 15% of total revenue in 2015 and 22% in the first three months of 2016. Over the next three years, PF’s total revenue is expected to reach Bt15,000-Bt17,000 million per annum, supported by the revenue base from housing units, higher income from condominium units, and more recurring income from hotel operations and rental assets.
PF’s financial profile is considered weak. Its operating profit margin (as measured by operating income before depreciation and amortization as a percentage of sales) deteriorated to 6%-9% during 2012-2014 and 5% in 2015, from 11%-12% during 2009-2011. The drop came because of the lower gross profit margin from residential projects and higher selling, general, and administration (SG&A) expenses from other businesses. PF’s net profit margin during 2012-2015 was very thin at 1%-3% of total revenue, much lower than the industry average of 10%. PF’s operating profit margin and net profit margin during the first quarter of 2016 recovered due partly to its higher profitability in residential projects and the seasonal effect from hotel operations. Regarding full year performance, PF’s operating profit margin over the next three years is expected to stay between 8%-10% and its net profit margin should not further deteriorate from the current level, taking into account the expected higher profit margin from residential projects and recurring income assets. A further decline in its profitability will negatively affect its rating.
The debt to capitalization ratio improved slightly to 65% as of December 2015 and March 2016, from 69% during 2013-2014. However, PF’s financial leverage remained high. Its large investments needed for residential projects and its expansion into more recurring income assets pushed financial leverage higher than most listed property developers. TRIS Rating expects that PF will be able to keep its debt to capitalization ratio at around 65%, or interest-bearing debt to equity ratio at around 2 times, despite its planned investments.
PF’s liquidity profile during the past four years weakened due mainly to relatively high financial leverage. The ratio of funds from operations (FFO) to total debt declined to 1%-3% during 2012 through the first quarter of 2016, from 5% during 2010-2011. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was only 1 times during the past five years, and improved to 3 times in the first three months of 2016. As of March 2016, PF had short-term borrowings worth Bt2,939 million and long-term debentures worth Bt2,400 million due in 2016, as well as long-term debentures worth Bt5,010 million coming due in 2017. PF’s financial flexibility as of March 2016 was supported by cash on hand of Bt3,000 million and undrawn unconditional credit facilities from long-term project loans of Bt8,700 million.
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