TRIS Rating affirms the company rating on Dusit Thani PLC (DTC) at “BBB+”. At the same time, we assign a rating of “BBB+” to the proposed issue of up to Bt1,000 million in senior unsecured debentures under its Bt5,000 million medium-term debenture program. The proceeds from the new debentures will be used to fund DTC’s planned investments and refinance its existing debts.
The ratings reflect DTC’s brand equity and conservative financial policies. These strengths are offset by DTC’s concentrated portfolio, intense competition in the hotel industry, and weak profitability. The ratings also take into consideration DTC’s efforts in developing a mixed-use property project. While the project will enhance DTC’s long-term growth prospects, its financial profile will weaken during the construction period.
For the first three months of 2018, DTC’s performance was in line with TRIS Rating’s expectation. DTC reported Bt1,439 million in revenue, relatively flat compared with the same period last year. Profitability slightly weakened year-on-year due mainly to higher employee benefit provisions related to the closure of Dusit Thani Bangkok and pre-operating expenses in the education business. Operating margin, measured by operating income before depreciation and amortization as a percentage of sales, was 19.2% in the first three months of 2018, compared with 21.6% the same period a year earlier.
The liquidity position and capital structure of the company remained sound. For the first quarter of 2018, funds from operations (FFO) was Bt293 million. The ratio of FFO to total debt was 26.1% (annualized, from the trailing 12 months). The total debt to capitalization ratio stood at 32.9% at the end of March 2018.
TRIS Rating expects DTC’s financial risk profile will weaken as it takes on more debt to fund the mixed-use project. However, DTC’s management team is committed to maintaining a conservative and prudent financial policy.
RATING OUTLOOK
The “stable” outlook reflects DTC’s conservative financial policy, as well as growth prospects in the hotel management service and education segments. DTC is expected to strengthen its competitive edge in order to withstand the volatile nature of the hospitality industry and to bolster its credit ratings.
RATING SENSITIVITIES
DTC’s credit upside is limited in the near term as the mixed-use project will require a sizable investment. A rating downside case could emerge if the operating margin falls below 10% for a sustained period or if huge debt-funded investments significantly weaken the balance sheet.
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