TRIS Rating Co., Ltd. has assigned a “BBB+” rating to the proposed issue of up to Bt5,000 million in senior debentures of Italian-Thai Development PLC (ITD). At the same time, TRIS Rating has affirmed the current company and issue ratings of ITD at “BBB+”. The outlook remains “negative”. ITD will use the proceeds from the new debentures to repay existing debt borrowed from financial institutions. The refinancing should enhance the liquidity position of the company, relaxing the near-term debt maturity profile. The ratings reflect ITD’s strong position as the largest general construction contractor in Thailand, large backlog, broad product line, geographic diversity, track record, and the expertise to undertake large and complex projects. The ratings also take into consideration the inherent risk of fixed unit price contracts, the cyclical nature of the engineering and construction (E&C) industry, intense competition, and rising level of financial leverage.
The “negative” outlook is based on ITD’s high financial leverage and weak operating performance, despite an improvement from the fourth quarter of 2008. Financial leverage is expected to slightly decline in 2009 and be substantially reduced in the first quarter of 2010. However, the ratings would be downgraded if there is a material deterioration in the financial profile, which might be caused by massive cost overruns in construction projects, increased investment in non-core businesses or the inability to divest investments in a timely manner.
TRIS Rating reported that ITD is Thailand’s largest construction contractor. Its market-leading position is supported by a strong track record, good relationships with private and public sector clients, economies of scale, self-sufficiency in key materials, an extensive machinery and equipment fleet, and an adequate supply of skilled labor and engineers. ITD’s total revenue in the first quarter of 2009 was Bt10,794 million, almost double the revenue of Thailand’s second largest construction contractor. The company operates nine business divisions, three foreign branches (Taiwan, the Philippines and India), and three foreign subsidiaries (Myanmar, India and Indonesia). The strategy to diversify the revenue base abroad helps maintain sales volume during slowdowns in the domestic construction industry. However, the strategy adds risk exposure due to unfamiliar business environments, as shown by the low profit margins of overseas projects. As of 6 May 2009, ITD’s backlog stood at Bt52,150 million, including Bt734 million in awarded projects waiting to be signed. Approximately 86% of ITD’s backlog was public projects and 76% was domestic projects.
After facing huge construction losses in 2008, ITD’s construction margin in the first quarter of 2009 improved to 4.98%, still lower than 6.31% in the same period of the prior year. The lower margin was due to the construction margin of overseas projects which dropped significantly to 0.85% from 4.84% in the first quarter of 2008. However, the construction margin of domestic projects increased to 8.72% from 7.67% in the first quarter of 2008. The operating margin (before depreciation expense) improved to 8.42% in the first quarter of 2009, compared with 7.17% in the same period of the prior year. The improvement was mainly attributable to lower selling and administrative expenses. During the first quarter of 2009, the company did not have extra charges such as provision for claims against subsidiary and administrative expenses for newly-opened subsidiaries as was the case in the previous year. The company also reversed a provision for a doubtful receivable worth Bt83 million.
TRIS Rating said, ITD’s financial leverage as of March 2009 was relatively unchanged from the end of 2008 despite an improvement in operating performance in the first three months of 2009. This was due to higher debt of its subsidiaries, especially PT. Thailindo Bara Pratama in Indonesia to fund construction activities. Adjusted debt (including a loan commitment to a special purpose vehicle) was Bt25,177 million, compared with Bt25,118 million as of December 2008. The adjusted debt to capitalization ratio was 66.8%. Due to the relatively large amount of debt, interest expense is a significant burden. Thanks to a lower interest rate on bank loans, ITD’s major source of debt, the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio improved to 2.3 times, compared with 1.66 times in the fourth quarter of 2008. Nonetheless, the company plans to deleverage by divesting its investment in Nam Theun 2 Power Co., Ltd. (NTPC). However, the transaction is not expected to close until the first quarter of 2010 due to restrictions in the shareholding agreement. The company expects to receive Bt4,200 million to Bt6,000 million in cash, depending on the valuation. -- End
Company Rating: Affirmed at BBB+ Issue Ratings: ITD099A: Bt706.7 million senior debentures due 2009 Affirmed at BBB+ ITD109A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ Up to Bt5,000 million senior debentures due within 2014 BBB+ Rating Outlook: Negative
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