TRIS Rating has affirmed the company rating of Areeya Property PLC (Areeya) at “BB+” and has revised downward the outlook to “negative” from “stable”. The “negative” outlook reflects concerns over the continued high level of financial leverage and weak liquidity profile. The “BB+” rating reflects Areeya’s acceptable track record in the middle-income segment of the residential property development industry. The rating also reflects the company’s small revenue base and volatile operating performance. In addition, the high household debt level nationwide and the cyclical and competitive nature of the property development industry remain the rating concerns.
The “negative” outlook reflects concerns over Areeya’s liquidity, since a large amount of debt must be repaid in 2017. Moreover, the persistently high level of leverage heightens concerns over the company’s ability to comply with the bond covenants. The rating could be downgraded if the debt to capitalization ratio remains higher than 70% or the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio continues to stay below 1.5 times. The outlook will be revised to “stable” if leverage and liquidity improve to our target levels on a sustained basis.
Areeya was established by the Laohapoonrungsee family in 2000 and listed on the Stock Exchange of Thailand (SET) in April 2004. The Laohapoonrungsee family has been the company’s major shareholders since inception, owning a 54% stake as of September 2016. Mr. Wisit Laohapoonrungsee remains Areeya’s chairman and chief executive officer (CEO). Areeya offers a wide range of residential property products including single detached houses (SDHs), semi-detached houses (semi-DHs), townhouses, and condominiums. Its products target the middle-income segment. As of September 2016, Areeya had 47 active projects. The value of the unsold units, across all of its active projects, was about Bt12,000 million. The largest portion (45%) of the value was in townhouse projects, with 33% in condominium projects, and 21% in SDH projects. Areeya’s backlog stood at Bt1,702 million as of September 2016. About 60% of the value of the backlog was condominium projects.
Areeya’s revenue from the property development business has ranged from Bt2,000-Bt4,000 million per year over the past few years, making the company smaller than most of the other property developers rated by TRIS Rating. The company derives more than half of its revenue from townhouses. Revenue in 2015 increased considerably to Bt5,401 million, due mainly to the sale of 50 rai of raw land worth about Bt1,200 million. Revenue in the first nine months of 2016 was Bt3,585 million, a 11.4% drop from Bt4,048 million in the first nine months of 2015. However, if the sale of raw land was excluded, revenue in the first nine months of 2016 would be 26.3% higher year-on-year (y-o-y). TRIS Rating forecasts Areeya’s revenue in 2016 will be nearly Bt4,500 million. Due to the small backlog, the company’s revenue stream during 2017 through 2019 will be based mainly on its ability to generate new sales.
Areeya’s profitability improved significantly in 2016. The operating profit before depreciation and amortization as percentage of sales (the operating margin) increased to 13.2% in the first nine months of 2016, from below 10% during the past few years. The increase was due to a significant rise in revenue, mainly due to the transfer of units in the A Space I.D. Asoke-Ratchada project. In addition, the gross margin in the first nine months of 2016 rose to a normal level of 33.6%, from 25.6% in 2015, a year when the company offered more sales promotions to boost sales. Going forward, Areeya’s profitability is expected to hold at the current level. More transfers of units in high-margin condominium projects will keep the operating margin at 10%-12% over the next three years, based on the assumptions in TRIS Rating’s base-case forecast.
Despite the recent improvement in profitability, Areeya’s financial leverage remains higher than projected. Due to an aggressive expansion during the past few years, the debt to capitalization ratio (including capitalized annual leases) has been high, holding at about 75% since 2014. As of September 2016, the net interest-bearing debt to equity ratio was 2.7 times, nearly the maximum level of 3 times stated in the terms of the bond indenture. In addition, its plans to launch two high-end condominium projects, worth about Bt16,000 million in total, could raise the level of financial leverage in the coming years. The high and lingering level of leverage raises concerns over the company’s ability to comply with its bond covenants. However, the leverage ratio could be lower if Areeya can speed up condominium sales or increase its base of equity capital. As of September 2016, the value of the units in the condominium projects, which remained unsold and were not yet transferred to buyers, was about Bt4,000 million. Total debt outstanding was Bt9,240 million.
Areeya’s cash flow protection remains weak due to the high debt level. The ratio of funds from operations (FFO) to total debt improved slightly to 3.1% in 2015 and 3.8% (annualized, from the trailing 12 months) in the first nine months of 2016, compared with below 3% during the past few years. The EBITDA interest coverage ratio also improved, rising to about 1 times during 2015 through the first nine months of 2016. However, the improvement was still below TRIS Rating’s expectations. Areeya financed its residential property projects mostly with bonds and bills of exchange (B/E). About Bt4,500 million in bonds and B/E are scheduled for repayment in 2017. As of September 2016, the company had undrawn credit facilities of Bt570 million and Bt264 million in cash on hand to support liquidity. FFO in 2017, based on TRIS Rating’s forecast, will be about Bt370 million. As a result, total sources of funds will be about Bt1,200 million. Given the schedule debt repayments, this translates into a cash shortfall of about Bt3,300 million. Areeya plans to finance most of the shortfall with new bonds. The company’s weak financial profile, due to the high financial leverage, raises concerns over the refinancing risk.
Areeya Property PLC (Areeya)
Company Rating: BB+
Rating Outlook: Negative