The ratings reflect LOXLEY's diverse range of businesses and long-established relationships with its customers and suppliers. The ratings also incorporate the sustained cash flow from sizable dividends received from its profit-making associated companies. Conversely, the ratings are tempered by LOXLEY's relatively low profitability and the volatility of its revenue stream, which is mainly project-based revenue.
The "stable" outlook reflects the expectation that LOXLEY can sustain its competitive position as it bids for projects and continues to show a sustainable level of project-based revenue. In addition, the company will continue to benefit from its diverse range of businesses and obtain considerable returns from its profitable associate companies. A rating upgrade is unlikely over the next 12-18 months but could occur if LOXLEY could significantly improve its profit margin and if its recent investments show notable payoffs. In contrast, downward rating pressure would emerge should LOXLEY experience a steep downturn in revenue, a further drop in profitability, or a material decline in amount of dividends it receives.
LOXLEY's business profile is satisfactory, underpinned by its diverse sources of revenue from multiple lines of business, which help mitigate fluctuations in revenue. LOXLEY, a conglomerate founded in 1939, and its wholly-owned and majority-owned subsidiaries, provides a wide range of products and services, primarily in three segments: (1) technology, (2) trading, and (3) services. LOXLEY, as an operating holding company, has also made investments in several associated companies and joint ventures. The several associated companies and joint ventures further widen LOXLEY's scope of operations to cover lines of business such as the production and distribution of lubricants, industrial coated and pre-painted steel, optical fiber cables, solar power plants, and more.
The technology segment accounts for the majority of LOXLEY's revenue. On average, the technology segment represented nearly 70% of total revenue annually over the past three years. In response to the volatility of project-based revenues and profits, LOXLEY is striving to create new sources of income. Currently, the recurring revenue is derived from the trading and the service segments, which contributed between 32%-36% of total revenue over the past three years.
The ratings also incorporate LOXLEY's long-term relationships with clients and suppliers. The company has a well-established market presence, particularly in the government sector, backed by its track record of projects completed for several government departments. LOXLEY has an expert and experienced management team and personnel. The company's employees are well-trained and capable of delivering high quality products and services across a range of industries. In addition, the high level of technical skill possessed by LOXLEY's staff creates innovations and new business opportunities despite the high overhead cost of employing a large number of technical staff. These strengths enable LOXLEY to repeatedly win the bidding for several government projects.
LOXLEY earns a sizable amount of dividends from its profit-making associated companies. The key associated companies stem from LOXLEY's partnership with BP PLC, one of the world's largest oil and gas companies, and BlueScope Steel Ltd., a leading steelmaker headquartered in Australia. The dividends are a stable, sustainable source of cash flow for LOXLEY since the associated companies have strong market presences and healthy financial performances.
At the opposite end, the ratings are constrained by LOXLEY's relatively low profitability and the volatility of its revenue stream. LOXLEY's performance predominantly derives from project-based revenue, particularly in the technology segment. LOXLEY relies on projects originated by the government and state-owned enterprises. The profit margin for a typical project is quite low, owing to the stiff competition. Most of the government projects are awarded through competitive bidding. LOXLEY'srevenue stream thus hinges on government budgets and the initiations of new projects. The projects carry a minimal amount of payment risk, but have relatively low profit margins. The bidding projects sometimes face delays or cancellation, which increase the volatility of LOXLEY's revenue stream. In addition, LOXLEY, as with its rivals in the ICT industry, must contend with fast-moving technological changes, hence some of its products or services might become outdated in a period of time.
In the first nine months of 2015, LOXLEY's revenue contracted by 21% year-on-year (y-o-y) to Bt8,056 million, owing to delays in some government-sponsored projects. LOXLEY's operating profit margin is generally low because of its high overhead. In the first nine months of 2015, LOXLEY recorded an operating loss of 1.7% following the drop of revenue.
LOXLEY's leverage is considered moderate. As most of the company's debts are project financing debts, leverage is generally elevated in the wake of acquiring project contracts. At the end of September 2015, total debt was Bt3,017 million, and the total debt to capitalization ratio stood at 32.3%. During 2016-2018, LOXLEY plans to invest around Bt180 million per annum, keeping the total debt to capitalization ratio below 30%.
The company has acceptable liquidity, buoyed by the dividends it receives from its major associated companies. Funds from operations (FFO), as adjusted by subtracting the company's share of profit of investments in associated companies and adding the cash dividends it receives, was around Bt700 million in 2013-2014. For the first nine months of 2015, the company reported FFO of Bt133 million. The FFO to total debt ratio decreased from 26.9% in 2014 to 15.5% (annualized from the trailing 12 months) in the first nine months of 2015. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio also declined from 5.3 times to 2.4 times during the same period. As of September 2015, the company had cash on hand of Bt508 million and marketable securities worth Bt403 million. The company has undrawn credit facilities of around Bt2,132 million, with long-term debt repayment obligations of around Bt113 million due during the next 12 months. As of September 2015, the company's outstanding short-term obligations were Bt2,008 million, parts of which were project finance facilities of Bt1,221 million.
TRIS Rating expects LOXLEY's revenue in 2015 will decrease by 15% from the previous year due to slow government projects. Subsequently, the company will incur an operating loss. The FFO to total debt ratio will fall to 10% while the EBITDA interest coverage ratio will stay at around three times. During 2016-2018, revenue is expected to increase and range between Bt14,000-Bt17,000 million. LOXLEY's operating profit margin is forecasted to stay low at around 1%-2%. The company is expected to receive Bt500-Bt600 million per annum in dividends from its investments. TRIS Rating estimates that LOXLEY's FFO to total debt ratio will recover to 20% and the EBITDA interest coverage ratio will exceed five times.
Loxley PLC (LOXLEY)
Company Rating: BBB+
Issue Rating:
Up to Bt1,000 million senior partially guaranteed debentures due within 2020 A-
Rating Outlook: Stable