TRIS Rating Co., Ltd. has affirmed the company rating of Krungthai Car Rent & Lease PLC (KCAR) at “BBB+” with “stable” outlook. The rating reflects KCAR’s experienced management team in the car rental business, sustainable market position during an unfavorable business environment in the previous year, relatively strong profitability, and efficient management of residual risk as shown by recurring gains from sale of leased assets. The rating also takes into consideration the rising corporate demand to outsource automobile maintenance services and the company’s financial liquidity, supported by stable cash flows from rental income generated from the long-term leased portfolio. The rating is constrained by concentration risk of large-sized customers and fierce competition, which will pressure the company’s profitability and business expansion in the short to medium term.
The “stable” outlook is based on TRIS Rating’s expectation that KCAR will be able to maintain its market position by retaining existing major customers and acquiring new accounts amidst an increasingly competitive environment. Profitability is expected to be maintained through cost control and recurring gain from the sale of leased assets.
TRIS Rating reported that KCAR provides both long- and short-term automobile operating lease services. In terms of net leased assets, KCAR is the third largest domestic automobile operating lease company of the 25 major firms in the TRIS Rating database. After recapitalization and listing on the Stock Exchange of Thailand (SET) in late 2005, KCAR’s net leased assets have grown more than double, rising from Bt1,283 million in 2004 to Bt2,977 million in 2009. Net leased assets decreased slightly to Bt2,890 million at the end of March 2010. In 2009, operating lease income accounted for 95.2% of total rental revenue, up from 94.4% in 2008. At the end of 2009, the company rented 5,597 automobiles, up from 4,995 units in 2008. During 2009, 95.5% of automobiles were under operating lease contracts with the remainder as short-term rentals and replacements. The ability to acquire new accounts and maintain existing customers was a major challenge during the sharp slowdown in the domestic economy last year. However, rising demand for leasing services has supported KCAR’s efforts to maintain the portfolio as more and more companies recognize the benefits of automobile operating leases. In addition, signs of economic recovery in 2010 are expected to support the opportunities for KCAR to expand its leased asset portfolio. Nevertheless, intense competition from both existing players and new comers remain constraints for the company’s business expansion and performance targets.
TRIS Rating said, KCAR has a competitive advantage through vertical integration with its related companies. In 2009, 72% of its leased assets were acquired through authorized car dealers owned by KCAR’s founding shareholders, the Chantarasereekul family, up from 54% and 65% in 2007 and 2008, respectively. KCAR benefits by getting information about special promotions offered by car manufacturers, which enables the company to acquire new cars at lower cost. In addition to more than 500 outsourced automobile maintenance service centers nationwide, KCAR also has its own automobile maintenance service center, which helps control unnecessary maintenance expenses. After contracts expire, KCAR liquidates all leased assets through its subsidiary, Krungthai Automobile Co., Ltd. (KA). With KA’s experienced management team and certification of used cars under the “Toyota Sure” program, KCAR is able to achieve higher prices than liquidation through traditional auction agents. The company has consistently recorded gains from sale of leased assets.
The company has employed a straight line depreciation method with no salvage value. Therefore, under the same contract conditions, KCAR’s depreciation expenses are usually higher than other operators who use the expected market value at the expiration date as the salvage value. Intense competition, together with the effect of a conservative depreciation policy during portfolio expansion in 2006-2009 decreased the company’s gross profit margin from the rental business, from 26.7% in 2006 to 19.2% in 2009. However, the conservative depreciation policy will benefit the company once it liquidates leased assets when the lease contracts expire, reflecting consecutive gains from the sale of leased assets. The operating cost controls and additional profits from the used car dealer business have also enhanced the company’s profitability.
In 2009, KCAR reported a net profit of Bt268 million, up 17% from Bt229 million in 2008. Net profit improved to Bt78 million in the first quarter of 2010, up 27% from Bt61 million in the same period of 2009. The substantial improvement of net profit in the first quarter of 2010 was mainly due to outstanding gains from sales of leased assets at Bt89 million, compared with Bt52 million in the same period of 2009. The net profit margin improved to 16.3% in 2009 from 15.7% in 2008. The return on average assets (ROAA) ratio increased slightly to 7.7% in 2009, from 7.6% in 2008. The profitability ratios were considered relatively high when compared with peers. KCAR’s financial liquidity and flexibility are moderate. The company has sufficient liquidity generated from stable rental income cash flows. In addition, the highly liquid nature of its assets partly mitigates liquidity risk, said TRIS Rating. -- End
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