TRIS Rating has affirmed the company and senior unsecured debenture ratings of Italian-Thai Development PLC (ITD) at “BBB-” with “stable” outlook. The ratings reflect the company’s solid market presence in the domestic engineering and construction (E&C) industry on the back of its track record of undertaking projects in a broad range of end markets. The ratings also consider ITD’s large and diverse project backlogs, as well as an upbeat outlook for domestic E&C opportunities over the next few years. However, the ratings are partially offset by weakening profitability, a lingering debt-heavy capital structure, execution risks from future long-term investment projects, and the cyclicality of the E&C industry.
The ratings reflect ITD’s strong business profile backed by its long-standing and well-established market presence among the top-tier and largest E&C contractors in the country. The company is the largest SET-listed E&C contractor by revenue. In 2015, ITD’s revenue was a record-high Bt51.3 billion, driven in large part by its operation in India. Revenue grew 5.1% year-on-year (y-o-y) in the first half of 2016. ITD’s business profile is also supported by its extensive track record of undertaking both public and private projects. With its experience and resources, ITD provides a complete range of construction and engineering works. ITD undertakes E&C projects across the country, servicing diverse customers. These strengths help alleviate concentration risks involving customers, products, and geography.
The ratings also consider the company’s large and diverse project backlogs. Business opportunities, arising to a great extent from promising government outlays for a number of large-scale infrastructure projects in the years ahead, also support the ratings. As government-sponsored E&C works are promising, ITD is poised for succulent growth in light of its bidding capability. Adding to its core E&C business in the domestic market, ITD has looked for growth by expanding abroad and exploring new business opportunities. Revenue from offshore operations has been derived for the most part from E&C projects in India through a majority-owned subsidiary.
On the contrary, the ratings are tempered by a weakened performance. ITD reported declining operating profits in recent years with tighter margin, albeit growing revenue. ITD suffered a net loss of Bt362 million in 2015, after a hefty interest burden and a substantial one-off loss on settlement of long-pending claims. ITD further reported a Bt117 million loss in the first half of 2016. ITD’s performance is also compounded by its unproductive assets, which preclude the company from generating a meaningful cash flow. In hopes of a broadened revenue base, ITD has carried out five investment projects: a potash mining in Thailand, the Dawei industrial estate in Myanmar, a toll road in Bangladesh, a bauxite mine and alumina plant in the Lao People's Democratic Republic (Lao PDR), and a railway and port concession in Mozambique. However, these much-anticipated projects have not made any significant contributions to the company, particularly the long-delayed potash and Dawei projects, which both to date have cost ITD nearly Bt10 billion in investments.
The ratings are also constrained by the company’s highly-leveraged capital structure. ITD has incurred an extensive amount of debt to fund its investment projects and its working capital requirements, leading to a huge interest burden and a weak financial structure. Given the company’s tendency to raise additional debt to supplement the upcoming E&C works, ITD is expected to remain saddled with debt loads over the medium run. The headwinds from burdensome indebtedness continue to put a lid on ratings. The ratings are also undermined by ITD’s exposure to execution risks of its long-awaited projects, primarily country risks and regulatory risks, which appear to outweigh the benefits. Like other E&C companies, ITD is at risk of the cyclicality of the E&C industry, whose downturn could have an impact on the sustainability of ITD’s revenue streams.
The “stable” outlook embeds our expectation that ITD will continue to secure sizable projects, and maintain its solid market position while it manages to enhance its profitability and liquidity. Moreover, ITD is capable of further strengthening its capital structure, allowing the company to carry out long-term projects while sustaining debt to capitalization ratio well below 70%, or interest-bearing debt to equity lower than 2.3 times during 2016-2019.
Given ITD’s relatively weak financial profile, the rating upgrade is unlikely over the next 12-18 months. Downward rating pressure could develop in the wake of a further diminishing profitability, or excessive debt-financed investments which will cause its debt to capitalization ratio to exceed 70% for a sustained period.
As of June 2016, ITD’s backlog stood at Bt249 billion. The backlog included a railway and port concession in Mozambique worth Bt114 billion and a toll road concession in Bangladesh worth Bt37.7 billion. The major construction works at both concessions have not yet begun. The backlog also includes the Hongsa mining in the Lao PDR, worth Bt23.1 billion, which will be realized during 2015-2029. Excluding the Mozambique concession and the Bangladesh toll road project, ITD’s backlog should secure 25%-40% of its annual revenues during 2016-2019.
ITD’s financial performance during the past 12 months fell short of TRIS Rating’s base-case estimate, albeit a 5.1% y-o-y rise in revenue in the first half of 2016. Operating margin (operating profit before depreciation and amortization as a percentage of revenue) in the first half of 2016 was 8.8%, increasing from 6.9% in 2015. The debt to capitalization ratio was 69.2% as of June 2016, constant from the end of 2015. The total debt has yet to wane due to a tightened liquidity arising largely from increasing receivables from the electric train projects. FFO (funds from operations) to total debt ratio stood at a weak 6.74% as of 2015 and edged up to 7.99% (annualized, based on the trailing 12 months) in the first half of 2016.
During 2016-2019, TRIS Rating’s base-case forecast expects ITD’s revenue (excluding revenue from the five investment projects) in a range of Bt50-Bt55 billion per annum. ITD’s operating margin is expected to be quite stable and should stay above 8% on average. The debt to capitalization is expected to stay in a range of 65%-70%, or the interest-bearing debt to equity ratio will range from 2-2.3 times. ITD is expected to generate FFO of at least Bt2.5 billion per annum. Capital expenditures are expected at Bt2-Bt2.5 billion per annum. The ratio of FFO to total debt is expected to stay higher than 7%. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio is expected to stay above 2 times.
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