TRIS Rating affirms the company rating and the senior unsecured debenture ratings of Supalai PLC (SPALI) at “A” with “stable” outlook. The ratings reflect SPALI’s proven track record in the residential property development industry in Thailand, well-known brand name in the middle-income segment, and strong financial position. These strengths are partly offset by a recent rise in SPALI’s leverage, the high household debt level nationwide, and the cyclical and competitive nature of the property development industry.
The “stable” outlook reflects the expectation that SPALI can maintain its sound operating performance and strong financial position. The FFO to total debt ratio should range between 20% and 25%, while the total debt to capitalization ratio should stay below 50% over the next three years. The credit upside situation may arise if its operating and financial performances are significantly stronger than expected. A higher revenue contribution from the investments in income-generating assets will be a plus for the ratings or outlook. In contrast, any significant deterioration in profitability or capital structure could cause the ratings or outlook to be revised downward.
Established by the Tangmatitham family in 1989, SPALI is one of Thailand’s leading property developers. As of March 2016, the Tangmatitham family, the largest shareholder, held a 29% stake in SPALI. At the end of June 2016, SPALI had 152 residential property projects. The units available for sale in these projects carried a total value of around Bt50,000 million. The company had a huge backlog, worth approximately Bt34,500 million or 1.6 times its annual revenue. SPALI’s residential project portfolio comprises condominium projects (56%) and housing projects (44%). The company derives its competitive edge from its ability to control operating costs, and thus offer competitively-priced residential units to homebuyers.
SPALI has explored investment opportunities abroad since 2013. It purchased an office building in the Philippines for about Bt900 million in June 2013. Moreover, it invested about Bt800 million in four joint ventures, with local partners in Australia, during 2014 through the first half of 2016. The four joint ventures are four residential property development companies. However, SPALI’s investments abroad account for a small portion of total assets. Rental income and the shares of profits and losses from the overseas investments were minor contributions to SPALI’s overall performance.
SPALI’s presales were Bt23,509 million in 2015, rising by 22.5% year-on-year (y-o-y). Condominium presales increased by 13.4% y-o-y to Bt12,853 million, while housing presales increased by 35.7% y-o-y to Bt10,656 million in 2015. The sharp rise in housing presales partly reflected the fact that SPALI has launched many more housing projects since 2014. Presales in the first half of 2016 increased by 20.3% y-o-y to Bt10,010 million. Housing presales were still the key growth driver, rising by 47.7% y-o-y to Bt6,542 million. In contrast, condominium presales fell by 10.9% y-o-y to Bt3,468 million. Condominium presales should accelerate in the second half of 2016. SPALI plans to launch many more condominium projects in the last half of the year, worth Bt15,500 million in total.
SPALI reported revenue of Bt21,364 million in 2015, up by 14.9% y-o-y. Revenue from condominium projects rose by 23.2% y-o-y to Bt12,789 million, while revenue from housing projects rose by 4.1% y-o-y to Bt8,209 million. During the first half of 2016, revenue grew by 24.1% y-o-y to Bt12,568 million. Revenue from condominium projects declined by 7.2% y-o-y to Bt6,096 million, but revenue from housing projects grew sharply by 84.7% y-o-y to Bt6,263 million. SPALI’s revenue stream during the remainder of 2016 through 2019 is partly secured by the Bt34,500 million backlog. The units in the backlog will be converted into revenue of about Bt7,300 million in the second half of 2016, Bt12,000 million in 2017, and Bt15,000 million during 2018-2019. SPALI should continue on its growth path over the next three years, bolstered by transfers of units in condominium projects launched over the past few years. TRIS Rating’s base case forecast assumes SPALI’s revenue will increase from about Bt20,000 million in 2016 to Bt29,000 million in 2019.
SPALI’s profitability is strong. Its profit margin remains higher than that of most property developers listed on the Stock Exchange of Thailand (SET). During the past five years, SPALI’s operating income as a percentage of sales (the operating margin) has ranged from 30% to 35%, except in 2015. The ratio dropped to 27.4% in 2015, from 31.9% in 2014, due to cost overruns on a condominium project. The operating margin recovered in the first half of 2016, rising to 29.2%. TRIS Rating’s base case forecast assumes the company’s operating margin will stay above 27% over the next three years.
SPALI’s financial leverage has increased steadily over the past few years, but remains at an acceptable level. The total debt to capitalization ratio increased to 49.7% in 2015, from a range of 30%-41% during 2011-2014. SPALI has taken on more debt to fund new projects and acquire more land. The total debt to capitalization ratio declined to 45.5% as of June 2016. In TRIS Rating’s base case forecast, the total debt to capitalization ratio is assumed to stay below 50% over the next three years.
SPALI’s cash flow protection has dropped as leverage increased. The fund from operation (FFO) to total debt ratio was 50% in 2011 and 53% in 2012, but has since fallen. The ratio ranged from 23% to 39% during 2013 through the first half of 2016. Despite the recent drop, this level is considered high for a property development company. Over the next three years, the FFO is forecasted at Bt5,000-Bt6,000 million per annum. SPALI has debts of Bt4,000-Bt6,000 million coming due annually. As a result, the FFO will be sufficient to meet the scheduled debt repayments. SPALI has a sufficient amount of financial flexibility, supported by a sizable undrawn committed credit facility worth around Bt25,000 million as of June 2016.
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