TRIS Rating Co., Ltd. has assigned a “BBB+” rating to the proposed issue of up to Bt2,000 million in senior debentures of Italian-Thai Development PLC (ITD). At the same time, TRIS Rating has affirmed the company rating and the ratings of ITD’s existing debentures at “BBB+” The outlook remains “negative”. The proceeds from the new debentures will be used to refinance existing debentures which will expire on 23 September 2010. The ratings reflect ITD’s position as the largest general construction contractor in Thailand, its strong backlog, broad product line, geographic diversity, vertical integration, and the government policy to boost economy through investment in infrastructure projects. The ratings also take into consideration the potential of ITD to reduce its debt load by selling its investment in the Nam Theun II Hydroelectric dam. However, these strengths are partially offset by the risks of cost overruns, in particular for the long duration fixed-unit price contracts; continued pressure on construction margins; exposure to the volatile and cyclical engineering and construction (E&C) business; and its relatively high leverage.
The “negative” outlook is based on ITD’s high financial leverage and weak operating performance, despite an improvement over the past several quarters. The ratings would be downgraded if the company cannot strengthen and stabilize its operating performance and reduce leverage as planned.
TRIS Rating reported that ITD is Thailand’s largest construction contractor. Its leading market position is supported by a strong track record, good relationships with both private and public sector clients, economies of scale, self-sufficiency in key raw materials, an extensive machinery and equipment fleet, and an adequate supply of skilled labor and engineers. ITD’s total revenue in the first half of 2010 was Bt18,279 million. The company operates nine business divisions, three foreign branches (in Taiwan, the Philippines and India), and four foreign subsidiaries (in Myanmar, India, Indonesia and Madagascar). Although the strategy to diversify the revenue base abroad helps maintain sales volume during slowdowns in the domestic construction industry, the strategy adds risk exposure from unfamiliar business environments. The group’s backlog as of 19 August 2010 was Bt87,916 million, including Bt1,303 million in awarded projects waiting to be signed. Around 64% of the backlog was from overseas projects mainly in India and Indonesia. Apart from geographic diversification, ITD also diversifies into the construction material businesses such as steel, concrete fabrication and cement. While vertical integration enhances ITD’s cost competitiveness by strengthening bargaining power with suppliers and mitigating the risk of raw material shortages, it does not mitigate the cyclical risk of the E&C business. In addition, investments in the capital intensive businesses such as cement production weakened ITD’s financial profile as the leverage rose on the consolidated balance sheet.
TRIS Rating said, although the industry is fragmented, a few major contractors benefit from the high barriers to entry. For example on large public projects, only prequalified contractors are able to bid. Therefore, the three largest contractors will have more chances to win the biddings for large public projects based on their proven track records and strong support from financial institutions. Transportation infrastructure projects and mining projects, for which ITD has the expertise and sufficient machinery on hand, should drive growth in the medium term. ITD also intends to bid on mega-projects to be launched both in Thailand and India.
For the first half of 2010, ITD reported a net loss of Bt66 million due to a decline in revenue and a significant increased in SG&A expenses. ITD’s revenue declined 14% year-on-year (y-o-y) to Bt18,279 million mainly because of lower revenue from the domestic market. Overseas revenue remained robust. Despite higher SG&A expenses mainly from its overseas operations, operating performance improved compared with the same period of the prior year as loss making projects were completed and material costs held steady. Operating margin before depreciation and amortization expenses increased to 8.91% for the first half of 2010, compared with 6.06% y-o-y.
The financial leverage of ITD as of June 2010 slightly increased from the end of 2009 despite an improvement in operating performance in the first half of 2010. The rise in leverage was due to its overseas subsidiaries, especially ITD Cementation India Ltd. (ITDCem), which needed more working capital to finance higher construction activities. Total debt as of June 2010 was Bt25,415 million, compared with Bt24,968 million as of December 2009. The debt to capitalization ratio was 68.98%. Due to the relatively large amount of debt, interest expense is a significant burden. However, the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio improved to 1.98 times, compared with 1.63 times in 2009. TRIS Rating expects that ITD’s leverage and cash flow protection will improve in the fourth quarter of 2010 at the latest, once the sale of investment in the Nam Theun 2 Power Co., Ltd. (NTPC) in Lao PDR is finalized. The company expects to receive approximately Bt3,500 million in cash. The amount is less than originally planned due to the appreciation of Thai baht.
Italian-Thai Development PLC (ITD) Company Rating: Affirmed at BBB+ Issue Ratings: ITD109A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ ITD146A: Bt5,000 million senior debentures due 2014 Affirmed at BBB+ Up to Bt2,000 million senior debentures due within 2015 BBB+ Rating Outlook: Negative Copyright 2010, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.