TRIS Rating affirms the company rating and senior debentures. no guarantee of Quality Houses Plc. (QH) at the “A-” level. TRIS Rating has also revised the company’s rating outlook to “Negative” or “minus” from “stable” or “stable”.
The “negative” outlook reflects the company’s slower-than-expected recovery in revenue and earnings, as well as a weaker market position in the housing segment. meanwhile The rating continues to reflect product diversification. as well as consistent dividend income from investments in associated companies and careful financial management of the company as well
The ratings also reflect TRIS Rating’s concerns about relatively high household debt and rising inflation, which will boost construction and financing costs for operators. At the same time reducing the purchasing power of homebuyers in the short to medium term.
Key Points Determining Credit Ratings
- The company’s performance was weaker than TRIS Rating’s expectations. including the launch of new projects that have been reduced and the closure of construction sites in Bangkok and surrounding areas in 2021, resulting in a continuous decline in sales of the Company’s residential real estate. The company’s hotel business is also affected by the protracted coronavirus disease 2019 (COVID-19) epidemic, which has resulted in a lower-than-expected number of foreign tourists. Revenue from operations in the year 2021 of the company continued to decline to the level of 8.1 billion baht from the level above 15 billion baht in 2018, which is lower than the TRIS Rating’s forecast is nearly 10%, while housing development revenue has dropped below Bt10bn for the third year in a row.
The company’s profitability has also weakened due to promotional campaigns for long-standing projects and the sluggish performance of the hotel. The company’s gross profit margin has dropped to 30% in 2021 from 31% in 2020 and 34%-35% during 2018-2019. That lowered the company’s profit base weakened.
Earnings before interest, taxes, depreciation and amortization (EBITDA) dropped even further to Bt2.7 billion in 2021 from Bt3.1 billion in 2020 and Bt4-5 billion. per year during 2018-2019 Although the company’s gross profit margin in the first quarter of 2022 improved to 34%, EBITDA stood at only Bt498 million, or 18% of the company’s full-year forecast. TRIS Rating last year at 2.8 billion baht.
- Its market share is weak in the mid- to high-end housing segment. In the past few years, the company has focused on improving housing inventory and draining inventories, with the launch of low-rise projects worth just 4.6k. million baht in 2020 and only 2.6 billion baht in 2021, a sharp drop from 7 billion baht to 11 billion baht during 2016-2019. Relatively low sales rates and reduced new project launches. As a result, the company’s market share has contracted significantly in the mid- to high-end housing segment, where demand remains strong and the company’s market share has been high before.
Going forward, the company plans to launch more low-rise projects worth Bt10 billion per year during 2022-2024 to help generate revenue growth. The company’s operations will recover but will remain below the level of 10 billion baht per year in 2022-2023. The company’s profitability is expected to be pressured by higher construction costs. This will include intense competition from leading operators and weak hotel profit margins. Therefore, TRIS Rating expects the company’s gross margin to fluctuate around 30% and the profit margin. Before interest expenses, taxes, depreciation and amortization (EBITDA margin) will range from 29%-31% during the forecast year. If the company’s earnings and earnings continue to decline further, this could have a negative effect. to credit rating
- A variety of products and brands that are accepted in the housing market The company has a wide range of housing products which include single detached houses, duplex houses, townhouses and condominiums. The target group is residential customers at various price levels, covering from low to high prices, such as single detached houses with prices higher than 25 million baht under the brand. “Pruekpirom” Detached houses in medium to high prices with a selling price of 15-25 million baht per house under the brand “Laddarom”. Single detached houses and semi-detached houses at moderate prices between 6-15 million baht per house under the “Pruekpirom” brand. The “Vararom” and “Casa Ville” brands, and low-priced semi-detached houses and townhouses between 2.5-6 million baht per unit under the “Q District” brand. Currently, housing estates are priced in excess of 10. million baht, accounting for 20% of the company’s total products. In the future, the company’s management may have plans to launch more residential projects in the middle to high price segment under the brand. “Pruekpirom” and “Laddarom”
TRIS Rating expects the new business direction of the company, coupled with well-known brands and a wide range of products, should give the company the flexibility to adapt its products to meet market demand. However, if the company’s market share declines further, it could negatively affect the company’s credit rating. As of March 2022, the company had a total of 71 projects. The project consists of 57 low-rise projects and 14 condominium projects. (Including those that have been built and not yet constructed) totaling 40 billion baht, which is a horizontal project, accounting for 69% of the total residual value and the remainder is a condominium project.
- careful financial management TRIS Rating expects the company to keep its debt to capitalization ratio below 35% over the next three years. The company’s leverage has been declining since the company’s project launch cost reductions. New and land purchases in the past few years amid the COVID-19 pandemic, the company’s debt-to-capitalization ratio at the end of March 2022 has dropped to 31%. from around 33% in 2021 and 41%-50% during 2016-2019.
Under TRIS Rating’s underlying assumption, the company is expected to launch new low-rise projects worth around Bt10 billion per year between 2022 and 2024, while the land purchase budget is expected to be around Bt10 billion per year. 3 billion baht per year In addition to the housing development business TRIS Rating also expects the company to make additional investments from the leasehold extension of its office rental business in 2024. TRIS Rating expects the company’s debt to capitalization ratio to stay at 30. %-32%, and the debt to earnings before interest, tax, depreciation and amortization ratio will swing around 4.5 times during the forecast year, according to the debentures and bank borrowings’ financial covenants. The net interest-bearing debt to equity ratio is only required to stay below 2. As of March 2022, the company’s ratio is 0.4 times. TRIS Rating believes it should meet the financial covenants in the 12 months. next month
As of the end of March 2022, the Company had total liabilities of 15 billion baht, consisting of debentures of 12 billion baht and long-term loans of 2.7 billion baht. 2.7 billion baht. Therefore, the company’s first-order debt to consolidated debt ratio stood at 19%, below TRIS Rating’s threshold of 50%. The ratings therefore view that the company’s unsecured creditors do not have a significant disadvantage in prioritizing claims over assets compared to creditors with prior repayment.
– Huge dividend income from investments in associated companies TRIS Rating views that the company’s liquidity position is supported by large investments in companies listed on the Stock Exchange of Thailand. The company holds shares in 2 companies and 2 property funds, namely Plc. .Home Product Center (HMPRO) (19.9% holding company), LH Financial Group Plc. (LHFG) (13.7%), Quality Houses Leasehold Property Fund (25.7%) and the Fund Total real estate and leasehold rights Quality House Hotel and Residence (31.3%)
The company has received dividends from investments in the company and these 4 mutual funds continuously. In the past 5 years, the company has realized a share of profit from such investments at approximately 1.4-1.9 billion baht per year and It receives a dividend of approximately 1.2-1.5 billion baht per year. In this regard, TRIS Rating expects the company to receive a dividend of approximately 1.1-1.3 billion baht per year during 2022-2024.
In addition, the market value of these investments is also high. At the end of March 2022, these investments had a fair value of 48 billion baht. Investments in these associates provide additional financial flexibility for The company and if these investments are sold will greatly strengthen the company’s financial position as well.
- sufficient liquidity TRIS Rating estimates the company will maintain adequate liquidity over the next 12 months. As of March 2022, the company has 9.1 billion in debt due in the next 12 months. The company has paid off Bt3.5 billion of debentures due in May 2022 by issuing new debentures and using internal cash. As for the remaining debentures due in November 2022, the company plans to refinance through issuing new debentures and using long-term loans.
The company’s financial liquidity sources include cash on hand of Bt3.9 billion and short-term bank loans of approximately Bt4.2 billion. TRIS Rating expects the company to have funds from operations over the next 12 months. In addition, the Company has land that is not burdened as collateral with a capital value of approximately 5.4 billion baht, which can be used as collateral for new credit lines. At the same time, the Company has prepared a credit line from a financial institution in the amount of 1.5 billion baht for debt repayment as scheduled in 2022. In the future, the company intends to manage the debt repayment that It will mature each year at around 4-5 billion baht.
The key underlying assumptions of TRIS Rating for the company’s operations during the years 2022-2024 are as follows:
- The company will launch new housing projects worth around 10 billion baht per year.
- The budget for the purchase of land will be at the amount of 3 billion baht per year.
- Total operating income will be approximately 9 billion baht to 10 billion baht per year with EBITDA margin at approximately 29%-31%.
The “negative” outlook reflects the company’s slower-than-expected recovery in revenue and earnings, as well as a weaker market position in the housing segment amid economic pressure. The company’s performance may deteriorate even further from the current level.
Factors that could cause a change in credit rating TRIS Rating may revisit its rating outlook to “stable” if the company’s operating performance improves, bringing the company’s revenue above Bt10bn and EBITDA. Sustainably in the level of more than 3 billion baht meanwhile The company’s financial position should not deteriorate from its current level.
on the contrary The rating could be downgraded if the company’s operating performance and/or financial profile deteriorates significantly from TRIS Rating’s base case assumptions, causing the debt to capitalization ratio to stay above 50. % and the debt to earnings before interest, tax, depreciation and amortization ratio exceeds 5 times continuously.
