The “stable” outlook reflects the expectation that SC will be able to sustain its acceptable financial profile in the medium term. Profitability might soften slightly from its current level due to lower contribution of rental property, but is expected to remain strong. With its aggressive project expansion plans, the company’s financial leverage is expected to increase but its debt to capitalization should be held below 50%.
TRIS Rating reported that SC is a medium-sized property developer which was founded in August 1989. After a takeover by the Shinawatra family in 1995, the company began a rental property business by developing “Shinawatra Tower 3”. SC reorganized its business to focus on the residential property business in 2003. The company was listed on the Stock Exchange of Thailand (SET) in November 2003. The Shinawatra family has continued to be the company’s major shareholder with a 61.12% stake as of May 2011. SC offers a various type of residential products including single detached houses (SDH), townhouses, home offices, and condominiums. Its existing residential products target middle- to high-income customers with prices per unit ranging between Bt5-Bt100 million for SDH units, Bt3.5-Bt4 million for townhouses, and Bt5-Bt7 million for home offices, with selling prices per square meter (sq.m.) of Bt70,000-Bt120,000 for condominium units. Sales of SDH units have remained the major source of total revenue, constituting more than half of total revenue during 2010 through the first quarter of 2011. Condominiums and townhouses accounted for around 23% and less than 10%, respectively. During 2010 through the first three months of 2011, revenue from rental property fell to 12%-13% of total revenue from 17%-20% during 2008-2009. The company focuses on developing small- to medium-scale residential projects tailored to meet customer preferences.
TRIS Rating said, SC’s presales reached a record high of Bt5,014 million in 2010, up 13% from Bt4,427 million in 2009. Presales during the first five months of 2011 sharply increased to Bt2,875 million, much higher than presales of Bt1,718 million during the same period of 2010. The growth in presales was due to a larger number of new projects launched in the fourth quarter of 2010, and the better absorption rate of its existing projects. SDH presales remained strong, growing significantly during 2010 through the first five months of 2011. In contrast, townhouse presales had decreased since the company launched only two townhouse projects in 2010, mostly focusing on SDH projects. Condominium presales during 2010 through the first five months of 2011 primarily came from “Centric Ratchada Suthisarn”. Revenue from residential property sales was Bt5,787 million in 2010, up 48% from 2009 due mainly to increased revenue from sales of SDH units and units in the “Centric Scene Ratchavipa” project. During the first quarter of 2011, residential sales slightly increased to Bt1,419 million from Bt1,333 million during the same period of 2010. Sales of SDH units continued to be the growth driver while revenue from rental property has continued to be a reliable source of income. Revenue from rental property held at Bt829 million per annum during 2009-2010 and rose to Bt217 million in the first three months of 2011 from Bt205 million in the same period of 2010.
SC’s profitability had been acceptable, supported by the high gross profit margin from rental property. The operating profit margin, at 25%-26% during 2010 through the first quarter of 2011, is considered strong compared with most listed property developers. SC’s liquidity remained acceptable. However, more project expansion during 2010 through the first three months of 2011 resulted in weaker cash flow protection. The funds from operations (FFO) to total debt ratio decreased to 26.5% in 2010 from 29.51% in 2009 and fell to 7.55% (non-annualized) in the first quarter of 2011 from 15.27% (non-annualized) in the same period of 2010. Financial leverage has been maintained at a low level.
As of March 2011, the total debt to capitalization ratio was 33.43% (without the revaluation of its rental properties, the total debt to capitalization ratio would be 38.21%). However, SC’s leverage is expected to increase in the near term due to its aggressive project expansion during 2011-2012.
TRIS Rating said about the demand for housing that it depends mostly on consumer confidence and the economic environment. The government usually provides supports for this industry during an economic downturn. Due to the government tax incentives scheme offered during 2008-2010 and the domestic economy which recovered more rapidly than expectation, demand for residential property has improved significantly since the second half of 2009. The momentum was maintained throughout 2010. Several developers have stepped up land acquisitions since late 2009 which caused the industry-wide leverage level to increase significantly in 2010. The changes in the loan-to-value policy (LTV ratio) implemented by the Bank of Thailand (BOT) in 2011 and rising interest rates are expected to curb the speculative demand in the condominium segment and reduce the affordability of housing for the low-income segment. Therefore, the growth rate of this industry is expected to be lower this year compared with the previous year. However, large developers are expected to gain more market share at the expense of smaller developers, as several major developers have diversified by entering the low-priced housing segment. This move will cause the competition in this segment to be more intense than before. Concerning the new government’s policies that are related to the property development industry, TRIS Rating will monitor the effects of the policies closely.
SC Asset Corporation PLC (SC)
Company Rating: BBB+
Rating Outlook: Stable