TRIS Rating Co., Ltd. has assigned the company rating of Sino-Thai Engineering & Construction PLC (STECON) at "BBB+". The rating reflects the company's long track record in Thailand's engineering and construction industry, the proficiency of its experienced management team, and its strengthened financial profile. However, these strengths are partially offset by the competitive and cyclical nature of the engineering and construction industry and margin pressures resulting from increasing material costs and the re-entry of contractors that have completed their debt-restructuring.
TRIS Rating reported that STECON is the third largest construction contractor in Thailand and was established in 1962 by Mr. Chavarat Charnvirakul to initially fabricate steel structures. STECON later expanded into general contracting, serving both the private and public sectors. The company has specialized skills and a strong track record in the energy and industrial sectors, especially for the construction of power and petrochemical plants. STECON experienced financial difficulties during the 1997 Asian crisis and completed a debt-restructuring program in late 2000 with the Charnvirakul family as the largest shareholder, holding a 17.7% stake as of December 2003. Members of the Charnvirakul family have led the management team since STECON was established.
TRIS Rating said that STECON's management team demonstrated its ability to implement strategies suitable for changing market conditions by changing its focus from private works to public works following the 1997 financial crisis. The company aggressively pursued projects in the public sector through joint ventures and competitive bidding. It has successfully established track record of government works and has been able to secure a substantial number of projects from the public sector during the last two years. Although public works generally provide the contractors with lower margins than private works, this is offset by more reliable revenue payment. Public sector projects typically pre-pay approximately 10% of contract value, which partially reduces the amount of working capital needed, while the escalator factor partially mitigates exposure to material price fluctuations. The public sector currently accounts for approximately 71% of STECON's backlog and will become the major driver of its growth in the next few years. STECON has secured a significant amount of new orders during the last two years, with the backlog increasing from Bt4,200 million in 2001 to Bt11,480 million in 2003, 1.6 times its historical peak in 1999. The average duration of the current backlog is 1.5 to 2 years. STECON's well-established market presence facilitates its ability to secure larger contracts, which enables it to achieve economies of scale. In 2003, it secured many projects worth more than Bt1,000 million each, which accounted for 37% of the total value of new projects. However, STECON's exposure in some fast-track projects, which have accelerated time frames for completion, is a concern. Although these projects normally provide higher margins, they have greater exposure to construction delays and cost overruns than typical projects. STECON can partly mitigate this risk by having good project management.
TRIS Rating also said that STECON recorded an increase in revenue from Bt3,931 million in 2002 to Bt5,316 million in 2003. Its operating performance has improved since 2001, with gross margins of approximately 13% during 2001-2003. At the end of 2003, its cash on hand and investment in marketable securities exceeded its interest bearing debts. STECON has minimal interest risk as most of its debts, which stood at Bt556 million, have fixed rates. However, with a higher backlog from 2003, STECON will need more working capital, and may require external funding if its cash cycle does not meet its target.
The engineering and construction industry is a competitive and cyclical sector, depending largely on government spending policy and private investment. The intense competition is partially mitigated by an increase in new projects that are available for bidding. The continued increase in material prices will have a negative impact on contractors' margin. Given the high volatility of the engineering and construction industry, STECON's credit profile will be sustained if it maintains a conservative financial policy regarding dividends and leverage, and maintains sufficient liquidity to withstand unforeseen adverse circumstances in the future, TRIS Rating said.-- End
Sino-Thai Engineering & Construction PLC (STECON)Company Rating: BBB+
TRIS Rating reported that STECON is the third largest construction contractor in Thailand and was established in 1962 by Mr. Chavarat Charnvirakul to initially fabricate steel structures. STECON later expanded into general contracting, serving both the private and public sectors. The company has specialized skills and a strong track record in the energy and industrial sectors, especially for the construction of power and petrochemical plants. STECON experienced financial difficulties during the 1997 Asian crisis and completed a debt-restructuring program in late 2000 with the Charnvirakul family as the largest shareholder, holding a 17.7% stake as of December 2003. Members of the Charnvirakul family have led the management team since STECON was established.
TRIS Rating said that STECON's management team demonstrated its ability to implement strategies suitable for changing market conditions by changing its focus from private works to public works following the 1997 financial crisis. The company aggressively pursued projects in the public sector through joint ventures and competitive bidding. It has successfully established track record of government works and has been able to secure a substantial number of projects from the public sector during the last two years. Although public works generally provide the contractors with lower margins than private works, this is offset by more reliable revenue payment. Public sector projects typically pre-pay approximately 10% of contract value, which partially reduces the amount of working capital needed, while the escalator factor partially mitigates exposure to material price fluctuations. The public sector currently accounts for approximately 71% of STECON's backlog and will become the major driver of its growth in the next few years. STECON has secured a significant amount of new orders during the last two years, with the backlog increasing from Bt4,200 million in 2001 to Bt11,480 million in 2003, 1.6 times its historical peak in 1999. The average duration of the current backlog is 1.5 to 2 years. STECON's well-established market presence facilitates its ability to secure larger contracts, which enables it to achieve economies of scale. In 2003, it secured many projects worth more than Bt1,000 million each, which accounted for 37% of the total value of new projects. However, STECON's exposure in some fast-track projects, which have accelerated time frames for completion, is a concern. Although these projects normally provide higher margins, they have greater exposure to construction delays and cost overruns than typical projects. STECON can partly mitigate this risk by having good project management.
TRIS Rating also said that STECON recorded an increase in revenue from Bt3,931 million in 2002 to Bt5,316 million in 2003. Its operating performance has improved since 2001, with gross margins of approximately 13% during 2001-2003. At the end of 2003, its cash on hand and investment in marketable securities exceeded its interest bearing debts. STECON has minimal interest risk as most of its debts, which stood at Bt556 million, have fixed rates. However, with a higher backlog from 2003, STECON will need more working capital, and may require external funding if its cash cycle does not meet its target.
The engineering and construction industry is a competitive and cyclical sector, depending largely on government spending policy and private investment. The intense competition is partially mitigated by an increase in new projects that are available for bidding. The continued increase in material prices will have a negative impact on contractors' margin. Given the high volatility of the engineering and construction industry, STECON's credit profile will be sustained if it maintains a conservative financial policy regarding dividends and leverage, and maintains sufficient liquidity to withstand unforeseen adverse circumstances in the future, TRIS Rating said.-- End
Sino-Thai Engineering & Construction PLC (STECON)Company Rating: BBB+