TRIS Rating has affirmed the company and the senior unsecured debenture ratings of SC Asset Corporation PLC (SC) at “BBB+” with “stable” outlook. The ratings reflect SC’s acceptable track record in the middle- to high-end segments of the residential property market, reliable cash flow streams from its rental property segment, and steadily growing revenues. These strengths are partially offset by SC’s relatively high financial leverage and small backlog size which might impact future revenues. The ratings also take into consideration the cyclical and competitive nature of the property development industry, plus concerns over the relatively high household debt level amid the current slowdown in the domestic economy.
The “stable” outlook reflects the expectation that SC will maintain its competitive position and financial profile in the medium term. The operating margin is expected to stay around 15%, while the debt to capitalization ratio is expected to stay in a range of 50%-60% over the next three years.
The company’s ratings and/or outlook could be lowered if its operating performance and financial profile significantly deteriorate from the current levels or if the total debt to capitalization ratio rises above 60% over a sustained period. The ratings or outlook could be revised upward should the FFO to total debt ratio improve to around 15% and the total debt to capitalization ratio stay at around 50%-55% on a sustainable basis.
SC is a property developer established in 1989. The Shinawatra family took over the company in 1995 and entered the rental property segment by developing Shinawatra Tower 3. In 2003, SC was reorganized to focus on developing residential property. The company was listed on the Stock Exchange of Thailand (SET) in 2003. The Shinawatra family continues to be the company’s major shareholders, with a 60% stake as of May 2016. SC offers a number of residential property products, including single detached houses (SDH), townhouses (TH), home offices, and condominiums.
SC’s existing residential property products target middle- to high-income customers, with an average price of Bt7.4 million per unit at the end of June 2016. As of June 2016, SC had 34 active projects. The value of the remaining unsold units in 34 projects was around Bt29,200 million. The company’s backlog was worth around Bt5,200 million. The units in the backlog to be delivered to customers are worth around Bt1,600 million in the second half of 2016, Bt860 million in 2017, and Bt2,700 million in 2018. SC’s backlog was relatively small when future revenue is concerned, especially when compared with its revenue base. During 2014 through the first half of 2016, revenues from SDH and TH segments accounted for 55% of total revenue, while revenues from condominium and rental property segments contributed around 40% and 5%, respectively.
SC’s presales in 2015 were Bt12,516 million, increasing by 47% from a low level in 2014. Presales in the first half of 2016 were Bt5,189 million, a fall of 12% from the same period last year. SC launched only two housing projects, with a total value of Bt1,700 million, in the first half of 2016. Going forwards, SC plans to launch new projects worth around Bt15,000-Bt20,000 million annually. TRIS Rating expects SC’s presales will range from Bt14,000-Bt18,000 million per year during 2016-2019.
The rising sales in housing projects coupled with government incentives made SC’s revenue in 2015 to rise to Bt14,050 million, up 12% from Bt12,601 million in 2014. During the first half of 2016, revenue was Bt8,465 million, up 43% from the same period in 2015. Sales of SDH units continued to be the major driver of SC’s revenues. The operating margin (operating income before depreciation and amortization as a percentage of revenue) in the first half of 2016 was 21.5%, up from 18% in 2015. The total debt to capitalization ratio at the end of June 2016 was 50.4%, decreasing slightly from 51.7% at the end of 2015.
Under TRIS Rating’s base case scenario, SC’s revenue is expected to range from Bt15,000-Bt19,000 million per annum during 2016-2019, with the exception of 2017. Revenue in 2017 is expected to be around Bt13,000 million, due to few condominium backlog to secure the revenue. However, TRIS Rating expects that SC will realize more revenues from the condominium projects in 2018 onwards. The revenue contribution from rental business was rather small, held steady at around Bt800 million per year. The operating margin is expected to stay around 15%, although SC is expected to spend more on marketing and administrative expenses in order to stimulate demand during the current economic slowdown. The debt to capitalization ratio is expected to stay around 50%-60% for the next three years.
SC’s liquidity is considered adequate. At the end of June 2016, the company had Bt724 million of cash and Bt5,597 million of undrawn committed credit facilities. SC will have Bt2,215 million in debts due over the next 12 months. Around 78% of the amounts due are bond redemptions while 22% are loans from financial institutions. The company plans to repay its bank loans with the cash it expects from transferring completed units in the backlog to customers. SC plans to refinance most of the maturing bonds with new bonds. Over the next three years, TRIS Rating expects the company’s funds from operations (FFO) to total debt ratio to stay above 10%, while the EBITDA (earnings before interest, tax, depreciation, and amortization) interest coverage ratio is expected to stay at around 3 times.
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