TRIS Rating has affirmed the company and the senior unsecured debenture ratings of Quality Houses PLC (QH) at “A-” with “stable” outlook. QH’s ratings reflect the company’s established track record in the property development industry, strong position in the middle- to high-income segment of the housing market, and the financial flexibility from involving its investments in marketable securities. The strengths are partially offset by the cyclical nature of the property development industry, QH’s relatively high level of financial leverage, concerns over the relatively high household debt level, and the slowdown in the domestic economy.
The “stable” outlook reflects the expectation that QH’s business profile will remain strong in the medium term. The company’s debt to capitalization ratio is expected to stay below 55% for the next three years. QH’s ratings and/or outlook could be revised downward should its financial profile deteriorate dramatically. For example, a prolonged market slump, leading to lower sales, would raise the debt to capitalization ratio above 60% on a sustainable basis. In contrast, the ratings could be revised upward if the company can improve its operating performance significantly from the current levels while keeping its debt to capitalization ratio lower than 50% on a sustainable basis.
QH was founded in 1983 and was listed on the Stock Exchange of Thailand (SET) in 1991. As of April 2016, QH’s major shareholders were Land and Houses PLC (LH, owning a 25% stake) and the Government of Singapore Investment Corporation Pte. Ltd. (11%). QH’s business profile is strong and the company is one of the leading property developers in Thailand. Over the past five years, it has been one of the five largest SET-listed property developers, based on revenue. QH has a strong market position, particularly in the segment of single-detached houses (SDH) priced over Bt5 million per unit. Over the past few years, the company has also delivered an acceptable performance in the lower-priced housing segment, with a price range between Bt1-Bt3 million per unit. The company’s housing brands are well-known and accepted by buyers.
QH’s financial profile during the past 12 months was in line with TRIS Rating’s expectation. Revenue in the first quarter of 2016 stood at Bt5,212 million, up 32% compared with the same period in 2015, thanks to the Thai Government’s real estate stimulus program. Presales of QH in the first quarter of 2016 stood at Bt4,549 million, down 8% from the same period a year ago. About 90% of its presales came from low-rise housing projects. The operating margin (operating income before depreciation and amortization as a percentage of revenue) in the first quarter of 2016 was 11.6%, being constant from 11.5% in the same period of 2015. The total debt to capitalization ratio at the end of March 2016 was 55.1%, slightly decreasing from 55.4% at the end of 2015.
Early in 2015, the company also launched a large condominium project, “Q Sukhumvit”, worth Bt10,754 million. As of March 2016, presales of Q Sukhumvit were only 16% of the total project value, lower than our target of around 30%. At the end of March 2016, QH’s backlog of condominium units was worth Bt6,755 million. The condominium units in the backlog are expected to be transferred during 2016-2018, producing Bt2,000-Bt2,800 million in revenue each year. The Q Sukhumvit project accounted for 26% of the total backlog.
During 2016-2018, TRIS Rating’s base-case scenario expects QH to generate a revenue range of Bt20-Bt25 billion per annum. Revenues from low-rise housing projects should account for 65%-75% of total revenues. The operating margin is expected to hold at 12%-14%. The total debt to capitalization ratio is expected to stay below 55%, taking into account the company’s plan to launch new real estate development projects worth approximately Bt20 billion per annum. Funds from operations (FFO) is expected to hold above Bt2 billion per annum.
QH’s liquidity profile remains acceptable. At the end of March 2016, QH had debts due over the next 12 months of Bt6,112 million. All due amounts are debenture redemptions. Most of the debts are expected to be refinanced with new debentures. QH’s liquidity sources included Bt3,201 million in cash and Bt2,687 million in undrawn long-term credit facilities as at the end of March 2016. The company’s liquidity position is enhanced by its sizeable portfolio of marketable securities. QH holds stakes in two SET-listed companies and two property funds: Home Product Center PLC (HMPRO) (a 19.9% stake), LH Financial Group PLC (LHBANK) (21.3%), Quality Houses Leasehold Property Fund (QHPF) (25.7%), and Quality Houses Hotel and Residence Freehold and Leasehold Property Fund (QHHR) (31.3%). These four firms provide dividends to QH on a recurring basis. At the end of March 2016, the portfolio carried a fair value of Bt30.2 billion, or about 1.1 times of the company’s total debt. During 2016-2018, the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio is expected to stay above 4 times. The FFO to total debt ratio is expected to range from 9%-12%.
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