TRIS Rating has affirmed the company rating of Charn Issara Development PLC (CI) at “BBB-” with “stable” outlook. The rating reflects the company’s acceptable track record in middle- to high-end condominium segment and hotel operations, as well as the recurring income it earns from renting commercial office space, and dividend income from its investments in the Sri Panwa Hotel Property Fund (SPWPF) and Bangkok Commercial Property Fund (BKKCP). These strengths are partly offset by the company’s relatively small revenue base, fluctuating operating performances, and relatively high leverage. The rating also takes into consideration the cyclical and competitive nature of the property development industry, and the relatively high level of household debts nationwide coupled with the current slowdown in the domestic economy.
The “stable” outlook reflects the expectation that CI will be able to sustain its financial position during 2016-2018. The company is expected to deliver the units in its backlog on schedule. The adjusted debt to capitalization ratio is expected to stay below 65% and the operating profit margin to be maintained at around 10%-15% for the next three years.
The credit rating and/or outlook could be revised upward if CI’s operating performance and its financial leverage improve significantly from the current levels. On the contrary, the rating and/or outlook could be revised downward if its operating performance falls below the expectation, or the company’s adjusted debt to capitalization ratio stays above 65% on a sustainable basis.
CI was established in 1989 and listed on the Stock Exchange of Thailand (SET) in 2002. The Issara family has been the company’s major shareholder since its inception. As of March 2016, the family held a 46% stake in the company. CI’s business scale is considered small compared with its SET-listed peers. Despite the various types of residential property, the number of the company’s projects was limited. Its products mainly target the middle- to high-end market segments. CI had 11 active projects as of March 2016. Its residential projects are located in Bangkok and provinces which are popular tourist destinations. The value of remaining unsold units in these projects was approximately Bt6,821 million. Nearly 62% of the remaining unsold value was in condominium projects, with the rest in residential villa, single detached houses (SDH), and townhouse projects. CI’s presales in 2015 was Bt543 million, dropping by 49% from 2014. The drop in presales was due to the fact that no project was launched in 2015 and the slowdown in domestic economy. Presales in the first quarter of 2016 were Bt305 million, up 41% from the same period last year. CI now has a backlog worth Bt1,782 million. Almost all of the units in its backlog are scheduled to be transferred to customers during 2016-2017.
Apart from its residential property projects, CI started developing a luxury boutique hotel in Phuket named Sripanwa in 2006. Sripanwa is a premium quality project and has received a very favorable response from customers. In addition, the on-site hotel helps increase the value of the residential villas offered for sale inside the Sripanwa project. In 2013, CI sold the Sripanwa hotel to the SPWPF, then leased back the hotel from the Fund. CI has a 15-year lease contract to operate the hotel. CI also invested in 30% of SPWPF. CI earns recurring income of Bt80-Bt90 million per annum from renting the commercial space in two Bangkok office buildings, Charn Issara Tower I and Charn Issara Tower II. Dividends received from investments in SPWPF and BKKCP are around Bt30-Bt35 million per annum.
CI’s financial profile during 2015 through the first quarter of 2016 was slightly better than TRIS Rating’s expectations. Revenue was Bt2,648 million in 2015 and Bt1,021 million in the first quarter of 2016. Most revenues came from the transfer of the condominium units in its backlog in three projects: 1) Baan Thew Talay Aqua Marine, 2) Baan Thew Talay Blue Sapphire, and 3) ISSI Condo Suksawat. CI’s operating profit margin (operating income before depreciation and amortization as a percentage of revenue) was 24.1% in the first quarter of 2016 and 17.1% in 2015, up from 10% in 2014. CI has a high level of leverage. The adjusted debt to capitalization ratio, considering the operating lease of the Sripanwa hotel as a debt obligation, ranged from 60% to 70% during 2013-2015. As of March 2016, the adjusted debt to capitalization ratio was 67%. CI’s financial leverage is expected to improve gradually over the next one to two years since the company plans to sell the new hotel units in the Sripanwa hotel phase 2 to SPWPF by the end of 2016. At the same time, SPWPF will be converted from a property fund to a Real Estate Investment Trust (REIT).
During 2016-2018, TRIS Rating’s base-case expects CI should generate revenue in a range of Bt2,500-Bt3,500 million per annum. The revenue contribution from the hotel operations and office rental are expected at around Bt600-Bt700 million per annum. The operating margin is expected to stay at around 10%-15%. The adjusted debt to capitalization ratio is expected to stay around 60%-65% for the next three years. Funds from operations (FFO) is expected to hold above Bt200 million per annum.
CI’s liquidity profile was moderate. At the end of March 2016, CI had Bt413 million in cash on hand plus undrawn long-term credit lines of Bt2,704 million. CI has debts due over the next 12 months of Bt1,220 million. The company typically matches the maturities of its short-term debts with the cash it expects to receive from transferring finished condominiums to its customers. CI plans to refinance most of the maturing bonds with new bond issues. During 2016-2018, the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio is expected to stay above 2 times. The FFO to total debt ratio is expected to stay above 5%.
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