TRIS Rating has upgraded the company rating of Syntec Construction PLC (SYNTEC) to “BBB” from “BBB-“. At the same time, TRIS Rating has revised SYNTEC’s rating outlook to “stable” from “positive”. The rating upgrade reflects the sustained improvement in the company's operating performance on the back of its strong market position in high-rise construction. The rating also takes into consideration the company’s sizable backlog and ample liquidity. The rating is tempered by a high reliance on the end-markets SYNTEC serves and the cyclical nature of the engineering and construction (E&C) industry.
The “stable” outlook reflects TRIS Rating's expectation that SYNTEC will maintain its strong market position in the construction segment, its core business. The company is also expected to keep profitability and its financial profile in line with expectations. More investments in commercial property should not substantially weaken liquidity and leverage.
Downward rating pressure would emerge if the financial profile deteriorates significantly, which could arise from a slip in competitive position, cost overruns, or excessive investments. Prospects for a credit rating upgrade are limited in the near term. However, an upgrade could materialize if SYNTEC can strengthen its construction business or succeed in the rental property business.
SYNTEC, established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1993, is a general contractor, specializing in the construction of high-rise residential and commercial buildings for private sector clients. Most of the projects it undertakes are in Bangkok. As of September 2016, the Phahusutr family was the company’s largest shareholder, owning about 24% of the total number of shares outstanding. Leveraging off its core construction business, SYNTEC, through its majority-owned subsidiaries, has expanded into commercial property, a strategic move to earn recurring rental and service income.
The rating upgrade reflects a sustained improvement in the company's operating performance. SYNTEC’s revenue and profits have been growing solidly since 2013. The company posted record-high revenue and profits in 2015. The improving performance mainly came from SYNTEC’s strong market position in high-rise construction, particularly residential property projects, which account for the vast majority of revenue. SYNTEC is well-positioned to keep acquiring new projects from top-tier property developers. The position is bolstered by its cost competitiveness and recognizable service record. Most of its clients are SET-listed developers, with satisfactory credit profiles. On the flip side, SYNTEC is heavily reliant on condominium projects from a few clients. For the past three years, the company’s biggest client has been Supalai PLC (SPALI), which contributed about one-fourth of its annual revenue. SYNTEC’s largest single project made up 10%-15% of revenue. However, the customer concentration risk is offset by the acceptable payment risks of SYNTEC’s reliable customers. SYNTEC, along with other E&C companies, is susceptible to the cyclicality of the E&C industry. The industry cycles are in large part derived from the property market. A drop-off in the demand for residential property could add to concerns over the sustainability of the company’s revenue streams.
SYNTEC expanded into the commercial property business in the hope of diversifying its sources of revenue. The company acquired the lease rights of Natural Ville Residence, a serviced apartment located on Langsuan road in Bangkok, in late 2013. It then developed three serviced apartments on green-field sites in Chonburi and Prachinburi provinces. The first project, Citadines Grand Central Sriracha, was launched in the first quarter of 2015. The remaining projects are under development. SYNTEC enlarged its footprint as it recently acquired assets of the Eight Thonglor Residences, a mixed-use development project. The company’s largest-ever acquisition was completed in April 2016 and cost SYNTEC about Bt2.5 billion. It funded the purchase Bt1.55 billion with long-term loans and the rest with equity.
Although SYNTEC has expanded into commercial property, the construction segment is still the dominant source of revenue, of which about 80% is from condominium projects. Revenue has ranged from Bt6-Bt7 billion over the past three years. Based on TRIS Rating’s base-case forecast, revenue is assumed to edge up to about Bt7-Bt8 billion over the next three years. Revenue from the construction segment will account for more than 90% of total revenue. The backlog currently stands at approximately Bt13 billion, far above the past level of Bt6-Bt8 billion. The sizable backlog, boosted by condominium projects in the medium to high-end customer segments, will secure about half of the company’s revenues over the next three years.
SYNTEC’s profitability has improved significantly over the past few years, as prices of raw materials fell and due to prudent reins on operating costs. The operating margin (operating profit before depreciation and amortization as a percentage of revenue) increased steadily from 0.5% in 2012 to 15.2% in the first half of 2016. Under TRIS Rating’s base case forecast, the operating margin is assumed to stay at about 10%, driving FFO (funds from operations) to Bt600-Bt800 million per annum over the next three years.
SYNTEC has a fairly conservative financial policy, as evidenced by its moderate leverage level and ample liquidity. The purchase of the Eight Thonglor Residences raised the debt to capitalization ratio to 31% at the end of June 2016, from 18.3% in 2015. The deterioration in the capital structure is, however, offset by contract-based rental and service income from the newly-acquired property. TRIS Rating’s base-case scenario assumes the debt to total capitalization ratio will remain under 40% over the next three years. SYNTEC maintains a sizable amount of liquid assets. Cash and marketable securities stood at about Bt1.8 billion as of June 2016. This not only increases the company’s financial flexibility, but also helps manage the sourcing of raw materials. SYNTEC can use its high cash balance to source raw materials before prices start to rise.
SYNTEC’s cash flow protection has increased, as profits have risen. The FFO to total debt ratio increased to nearly 90% during 2014 and 2015, while the EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio increased to 13.2 times in 2014 and 20.1 times in 2015. Cash flow protection is expected to fall in the years ahead as SYNTEC plans to renovate the Eight Thonglor Residences and develop the other two serviced apartments. SYNTEC is also looking for more investments, which could undermine liquidity. However, cash flow protection is forecasted to remain at an acceptable level. TRIS Rating’s base-case forecast assumes the FFO to total debt ratio will stay above 30%, while the EBITDA interest coverage ratio will stay above 7 times for the next three years.
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