TRIS Rating Co., Ltd. has assigned a “BBB+” rating to the proposed issue of up to Bt2,500 million in senior debentures of CH. Karnchang PLC (CK) and at the same time has affirmed the current company and issue ratings of CK at “BBB+” with “stable” outlook. The proceed from the new debentures will be reserved for CK’s bond redemption totalled Bt3,000 million later this year. The ratings reflect CK’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in undertaking government infrastructure and specialized projects, and an ability to generate recurring income from concession investments. The ratings are partially offset by high backlog concentration, high financial leverage due to concession investments, the inherent risk of fixed-price contracts, and downward pressure on profit margins as a result of a sluggish construction market.
The “stable” outlook reflects the expectation that CK will maintain its market position and pursue a growth strategy through selective investments in good quality concessions, so as not to further deteriorate its financial profile from the current level.
TRIS Rating reported that CK is one of the top three construction companies in Thailand. The company’s construction experience encompasses a broad array of construction activities, ranging from general civil work to highly sophisticated projects. These diverse experiences, together with a strong relationship with leading foreign contractors, help enhance the company’s business profile. Revenue from construction grew rapidly during the past three years, rising from Bt6,852 million in 2004 to Bt13,440 million in 2007. However, operating margins during the same period lowered from 16.5% to 4.2% due to higher competition and rising construction material costs. Around half of CK’s backlog was concentrated in the Nam Ngum II dam project. The backlog is expected to be enhanced after the company signs an agreement to construct the first contract of Purple-Line electric train worth approximately Bt16,700 million.
CK’s concessions cover several infrastructure assets, including expressways, underground mass transit, tap water, and electricity. As of September 2008, the investments included a 16.5% stake in Bangkok Expressway PLC (BECL), a 24.6% share of Bangkok Metro PLC (BMCL), a 38.0% holding in South East Asia Energy Co., Ltd. (SEAN), and a 35.3% holding in Thai Tap Water Supply PLC (TTW), which also held 98.0% of Pathum Thani Water Co., Ltd. (PTW). Most of CK’s concession investments are funded by debt, pushing the leverage level higher over the past three years. Though BECL and TTW have already contributed dividends and equity income, BMCL still experiences losses. The Nam Ngum II project undertaken by SEAN is in the construction phase and is expected to generate income no later than 2011.
CK’s financial profile is lower than expectation, reflecting its high debt level despite a slight improvement in operating margins in the first nine months of 2008. Financial leverage is considered high. Liquidity remains acceptable, partly enhanced by a large holding of sound marketable securities. TRIS Rating remains concerned over CK’s future financial commitments in terms of machinery acquisition, shareholder supports, and concession investments, which will likely constrain the company from making meaningful reductions in the debt level over the medium term. The company’s balance sheet capacity is further limited by financial covenant of keeping net debt to equity ratio not to exceed 2.5 times. As of September 2008, the ratio stood at 2.4 times, but is expected to improve to slightly above 2.0 times for year end 2008. TRIS Rating also views that at least in the short run, CK’s risk profile is escalated in view of tightened credit environment and volatile stock market performance which may impact CK’s investment portfolio value and its capital base. Therefore, a considerable rise in leverage will likely exert pressures on the company’s financial flexibility and credit profile. -- End
Company Rating: Affirmed at BBB+ Issue Ratings: CK099A: Bt2,000 million senior debentures due 2009 Affirmed at BBB+ CK09OA: Bt120 million senior debentures due 2009 Affirmed at BBB+ CK09OB: Bt880 million senior debentures due 2009 Affirmed at BBB+ CK102A: Bt1,100 million senior debentures due 2010 Affirmed at BBB+ CK107A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ CK114A: Bt2,000 million senior debentures due 2011 Affirmed at BBB+ Up to Bt2,500 million senior debentures due within 2014 BBB+ Rating Outlook: Stable
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