TRIS Rating affirms the company rating of CH. Karnchang PLC (CK) and the ratings of CK’s outstanding senior unsecured debentures at “A-”. At the same time, TRIS Rating assigns a rating of “A-” to CK’s proposed issue of up to Bt2,750 million in senior unsecured debentures, due within 10 years. The new issue rating replaces the issue rating previously assigned on 16 July 2018, following CK’s request to increase the issue size to up to Bt2,750 million, from Bt2,000 million. The company will use the proceeds from the new debentures to refinance the existing debentures.
The ratings reflect CK’s position as a top-tier contractor, its ability to undertake large-scale and sophisticated construction projects, as well as the synergy and financial flexibility the company gains from its strategic investments. However, the ratings are constrained by the company’s high leverage, as well as the cyclicality of and competitive threats in the engineering and construction (E&C) industry.
CK’s operating performance in the first quarter of 2018 was below TRIS Rating’s expectation. Revenue was Bt7.4 billion, down 8% from the same period a year ago. The gross profit margin in the first quarter of 2018 increased slightly to 8.6%, from 8.3% in 2017. CK generated funds from operations (FFO) in the first quarter of 2018 for about Bt518 million, up 22% from the same period last year.
CK’s backlog as of March 2018 stood at Bt65.4 billion. Major projects in the backlog include the MRT Orange Line project contracts worth a combined value of Bt24.8 billion, the maintenance and engineering (M&E) equipment contract for the MRT Blue Line worth Bt13.9 billion, and the Xayaburi hydropower dam project worth Bt11.6 billion. These three projects account for 77% of the company’s total backlog value.
At the end of March 2018, CK’s debt to capitalization ratio was 61.67%, down from 62.21% in 2017 and 68.0%-72.0% during 2013-2016. This ratio improved after CK transferred the project loan of the MRT Purple Line project to Bangkok Expressway and Metro PLC (BEM), which was in line with TRIS Rating’s expectation. Nevertheless, TRIS Rating expects the debt to capitalization ratio of CK to remain elevated, taking into consideration working capital needs and the sponsor loan to the Xayaburi project.
RATING OUTLOOK
The “stable” outlook reflects TRIS Rating’s expectations that CK will remain highly competitive in securing new projects. In the base case scenario, TRIS Rating assumes CK’s revenue will be around Bt35-Bt38 billion per annum during 2018-2020. CK’s strong backlog should secure future revenue. Moreover, we expect to see that CK could sustain its gross margin above 8% on average despite stiff competition and the total debt to capitalization ratio could stay below 65% over the next three years.
RATING SENSITIVITIES
A credit upside is possible if CK could significantly enhance cash flow protection by generating stronger-than-expected FFO, as well as maintain its debt to capitalization ratio below 60% for a sustained period. A credit downside will be caused by significant cost overruns in major projects or unanticipated, extensive financial support provided to its affiliates, which would markedly hurt CK’s cash flow.
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