TRIS Rating affirms the company rating on Quality Houses PLC (QH) and the issue ratings on QH?s outstanding senior unsecured debenture at ?A-? with a ?stable? rating outlook. At the same time, TRIS Rating assigns the rating of ?A-? to QH?s proposed issue of up to THB3 billion senior unsecured debentures due within five years. The company plans to use the proceeds from the new debentures to repay some of its existing debentures.
The ratings reflect QH?s diversified portfolio with moderately strong market position in the landed property segment, satisfactory profitability despite a decline in revenues, financial flexibility from its investments in affiliates, and its lower leverage level during the downturn. The ratings also take into consideration our concerns over the adverse effects of the Coronavirus Disease 2019 (COVID-19), which could continue to suppress the demand for residential properties over the short to medium term.
QH?s operating performance remains under pressure amid concerns over the lingering impact of COVID-19. QH?s operating revenue during the first nine months of 2020 declined by 20% year-on-year (y-o-y) to THB6.72 billion, in line with our previous forecast. The drop was mainly due to the intense competition and poor performance of its hotel operations during the pandemic. However, the company was able to maintain its profitability at a satisfactory level. Although its gross profit margin softened from promotional campaigns on condominium projects and margin pressure on its hospitality business, effective cost controls helped the company maintain the gross profit margin at 31% during the first nine months of 2020. In addition, a significant amount of share of profits from the company?s investments in affiliates helped sustain its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin at 36.5% in the first nine months of 2020. Given its cost efficiency and profit sharing from affiliates, we expect QH to maintain its EBITDA margin of above 30% over the next three years.
However, the recent resurgence of COVID-19 infections may dampen the recovery prospects of the Thai economy in 2021. We see continued challenges to property developers in the short- to medium-term. We expect QH will have to constantly update its products and marketing strategy to stay competitive in this market. In 2021, QH plans to launch three housing projects worth THB5.33 billion. As of September 2020, QH had 78 projects, comprising 64 housing projects and 14 condominium projects. The value of unsold units was THB45.3 billion. Landed property projects accounted for 70% of the total remaining value, while the rest was ready-to-transfer condominium projects.
We expect QH to maintain financial leverage at the current level in the short to medium term. QH?s debt to capitalization ratio was 40% at the end of September 2020. As the company plans to launch only housing projects which require less capital than high-rise condominium projects, we forecast its debt to capitalization ratio to stay below 50% during 2021-2022. The financial covenant on QH?s debt obligations requires the maintenance of net interest-bearing debt to equity ratio below 2 times. The ratio at the end of September 2020 was 0.6 times. We believe the company should be able to comply with this financial covenant over the next 12 months.
We assess QH?s liquidity to be manageable over the next 12 months. At the end of December 2020, QH has debts coming due over the next 12 months of THB6.4 billion, comprising THB4.6 billion in debentures, THB1 billion in bills of exchange (B/Es), and THB800 million in long-term loans. The company plans to refinance the maturing debentures with new debenture issues and/or bank borrowings, as well as repay all outstanding B/Es with internal cash. QH?s source of liquidity at the end of December 2020 comprised cash on hand of around THB2.5 billion and available short-term credit facilities of around THB4.21 billion. We forecast QH?s funds from operations (FFO) over the next 12 months to be around THB2.38 billion. The company also has unencumbered land at cost worth THB21.17 billion. In addition, the sizeable investments in its affiliates could be another source of liquidity, if needed. QH holds stakes in two listed companies and two property funds: Home Product Center PLC (HMPRO, a 19.9% stake), LH Financial Group PLC (LHFG, 13.7%), Quality Houses Leasehold Property Fund (QHPF, 25.7%), and Quality Houses Hotel and Residence Freehold and Leasehold Property Fund (QHHR, 31.3%). At the end of December 2020, the portfolio carried a fair value of THB41.50 billion.
RATING OUTLOOK
The ?stable? outlook reflects our expectation that QH will be able to sustain its operating performance at the target levels. During 2020-2022, we expect QH to generate revenues of THB8-THB11 billion per annum. The company should maintain the debt to capitalization ratio below 50%. The debt to EBITDA is forecast to jump in 2020 and then drop to stay below 6 times in 2021-2022. The EBITDA margin is expected to remain above 30% over the next 2-3 years.
RATING SENSITIVITIES
QH?s ratings and/or outlook could be revised downward should its operating performance and/or financial profile deteriorate significantly from the target levels, such that the debt to capitalization ratio stays above 60%, and the interest-bearing debt to EBITDA ratio higher than 6 times for an extended period. In contrast, the ratings and/or outlook could be revised upward if the company could improve its operating performance significantly, while its financial profile does not deteriorate from current levels.
RELATED CRITERIA
- Rating Methodology ? Corporate, 26 July 2019
- Key Financial Ratios and Adjustments, 5 September 2018
Quality Houses PLC (QH)
Company Rating: A-
Issue Ratings:
QH213A: THB3,000 million senior unsecured debentures due 2021 A-
QH214A: THB600 million senior unsecured debentures due 2021 A- QH225A: THB3,500 million senior unsecured debentures due 2022 A- QH22NA: THB4,000 million senior unsecured debentures due 2022 A- Up to THB3,000 million senior unsecured debentures due within 5 years A- Rating Outlook: Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2021, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient?s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.