TRIS Rating Co., Ltd. has affirmed the company rating of Land & Houses PLC (LH) and the ratings of its senior debentures at “A”. At the same time, TRIS Rating has revised the rating outlook of LH to “stable” from “negative”. The ratings reflect LH’s well-recognized brand, plus its long track record and leading position in the residential property development market. The ratings also take into consideration the financial flexibility and a degree of synergy from its strategic investments in associated companies, which has helped the company become the market leader and the most integrated residential property developer. However, these factors are partially offset by political instability, the cyclical nature of the property development industry, intense competition in land acquisition, and an expected rise in financial leverage.
The “stable” outlook reflects LH’s improving and better-than-expected operating performance as well as a more favourable market perception than previously estimated. The company is also expected to sustain its market competitiveness, growth momentum and cash flow protections at acceptable levels. However, incurring a significant level of debt financing for a commercial and residential project, “Terminal 21”, which raises the leverage level for longer period than expected, will likely push its credit profile below the current rating category.
TRIS Rating reported that LH, Thailand’s leading residential property developer, was established in 1983 by the Asavabhokhin family. As of May 2010, the Asavabhokhin family held 30.9% of the company’s shares, followed by the Government of Singapore Investment Corporation (GIC) at 16.5%. Residential property sales were the major source of revenue, accounting for 98% of total revenue in 2009 with rental and management service income contributing the rest. LH’s core products are single detached houses (SDHs), which contributed approximately 72% of total revenue in 2009, while townhouses and condominiums generated around 8% and 18%, respectively. LH’s competitive edge stems from its lengthy and extensive experience in delivering quality housing to customers. As of March 2010, LH had unsold residential units worth Bt33,660 million, or approximately 1.9 times annual sales of residential units.
In the first quarter of 2010, LH’s residential property sales were Bt4,181 million, compared with Bt2,963 million in the same period a year ago. Property sales in 2009 were Bt17,275 million, up 12% from last year at Bt15,409 million, thanks to a recovery in housing demand since the second half of 2009 and revenue from “The Room Ratchada-Ladprao” condominium project. Benefiting from the government tax incentives, operating income before depreciation and amortization as a percentage of revenue stayed at around 23%-24% from 2008 to the first quarter of 2010, up from 18.5% in 2007. TRIS Rating expects the profitability ratio to fall by 3%-4% after most of the tax incentives expire in 2010. The pretax return on permanent capital (ROPC) has held at 10%-12% for the past three years. LH’s liquidity profile is acceptable. The funds from operations (FFO) to total debt ratio was 3.5% (non-annualized) in the first quarter of 2010 and 21.9% in 2009. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratios were 10.8 times and 7.7 times in the same period. Total debt as of March 2010 was Bt19,771 million, up from Bt16,785 million as of year-end 2009. The higher debt level reflects the issuance of Bt3,000 million in debentures during the first quarter of 2010 to repay Bt2,000 million in debentures in April 2010 and to finance working capital. The debt to capitalization ratio as of March 2010 rose slightly to 41.0%, from 38.0% at the end of 2009. LH has an aggressive dividend policy, paying out over 80% of net profits during the past few years.
TRIS Rating expects LH’s leverage to rise moderately and stay elevated over the next two to three years as a result of additional debt financing for the “Terminal 21” project. However, with the project value at Bt6,000 million, TRIS Rating expects the company to finance some portion of the project cost from operating cash flow. TRIS Rating does not view LH’s balance sheet as fundamentally strong enough to support additional debt for the entire project cost, especially for a long-term project such as this one. Too much debt financing will likely elevate the debt to capitalization ratio for far too long. Without strong recurring income supports or cost control measures, this will likely weaken the financial cushion needed to weather adverse market conditions or handicap its ability to capture market growth. TRIS Rating considers such scenarios as inconsistent with the company’s current rating category.
The residential property market was volatile in 2009, reflecting the national political instability and the global financial crisis. Although it recovered in the second half of 2009, the market remained relatively slow and has been increasingly dominated by major developers. After delivering favorable performance in 2009, almost all large developers have set aggressive expansion plans for the next two to three years. The acquisition of land in appropriate locations will likely be more expensive. Most government tax incentives will expire in 2010. Therefore, demand for residential property in 2010 will depend heavily on consumer confidence and the pace of economic recovery. TRIS Rating expects to see demand for residential property in 2010 to gradually recover alongside growth in the domestic economy. -- End
Company Rating: Affirmed at A Issue Ratings: LH119A: Bt2,000 million senior debentures due 2011 Affirmed at A LH127A: Bt3,000 million senior debentures due 2012 Affirmed at A Rating Outlook: Stable from Negative
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