Fitch Affirms Siam Future at 'BBB(tha)'; Outlook Stable

Friday 27 September 2019 11:43
Fitch Ratings (Thailand) Limited has affirmed Siam Future Development Public Company Limited's (SF) National Long-Term Rating at 'BBB(tha)' with a Stable Outlook, its National Short-Term Rating at 'F3(tha)' and its outstanding senior unsecured debentures at 'BBB(tha)'.

KEY RATING DRIVERS

Lower Leverage Than Expected: Fitch expects SF's funds flow from operations (FFO) adjusted net leverage to remain at 5.0x-5.5x (end-1H19: 5.5x) over the next three years, lower than the 6.0x-6.5x we previously forecast, because the company deferred the capex on its new shopping centre at Marketplace Thonglor by one year, and expects spending to be more staggered. We expect SF's total capex to continue to be about THB1.5 billion during 2019-2021, which includes the new shopping centre. Besides cash flow from its own shopping centres, we expect SF to continue to receive a stable dividend of about THB200 million a year over the next three years from its 49%-owned Mega Bangna shopping centre.

Healthy Revenue from Portfolio: Fitch expects SF's average occupancy to rise to about 92% in 2020-2021 from 87%-88% in 2018-2019. This is mainly due to the replacement of one of its anchor tenants in 3Q19 in its Petchkasem Power Center after the space was left empty for around two years. The new tenant is contracted for an initial period of three years with the option to extend. SF should achieve 6%-7% revenue growth in 2019, driven by full-year contribution from the expansion of Marketplace Nanglinchee, which was completed in December 2018, as well as the opening of Marketplace Dusit in early 2019, and improving performance of three renovated shopping centres. From 2020 onwards we expect revenue to increase by around 2% annually, driven by stable occupancy and an organic rate of rental renewals.

Strong Market Position: SF's granular portfolio of shopping centres, and significant experience in managing the properties for more than 20 years gives the company an advantage over its peers in developing mid-sized open-air malls. Most of SF's properties are of high-quality and are diversified in terms of location. Although some of its community malls are not as cash accretive as the company hoped, the portfolio occupancy has remained higher than 85%. SF's strategy is to focus on expanding existing shopping centres with proven performance, and to change the mall concepts and tenant mix of weaker centres to attract more traffic.

Cash Flow Visibility: SF has long-term leases on 50%-55% of its total gross leaseable area (GLA) from its anchor tenants, which contribute to 25%-30% of its revenue due to lower average rental rate on such leases. SF's tenants are somewhat concentrated, with its 10 largest tenants accounting for about 25%-30% of total revenues, and the largest accounting for just under 10%. However the large tenants are from diverse industries and are generally well-established. SF's contractual rental income is mostly fixed and provides a buffer against weak consumption and spending during economic downturns. Lease expiries are manageable with 12% and 14% of GLA coming due in the 12 and 24 months after 30 June 2019, respectively. SF says that generally more than 80% of its maturing leases are renewed by existing tenants with a typical rental increase of 5%-10% upon renewal for a three-year lease contract.

Secured Debt to Increase: The company plans to use project financing loans for its new mixed-use project to be built at the existing Marketplace Thonglor in 2020-2021. Therefore, secured debt is likely to rise, leading to an increase in the ratio of prior-ranking debt to EBITDA to above 2.0x - the threshold beyond which Fitch may notch unsecured debt for material subordination (1H19: 1.2x). However, given the asset-heavy nature of SF's business, Fitch also considers the measure of unencumbered assets to unsecured net debt. SF's unencumbered asset to unsecured net debt was about 5.0x at end-June 2019, which is substantially stronger than the 2.0x threshold below which Fitch may consider notching the unsecured debt of property investment companies.

DERIVATION SUMMARY

SF is a leading community mall developer in Thailand. Its closest rating peer is JWD InfoLogistics Public Company Limited (JWD, BBB(tha)/Stable), a leading full-service in-land logistics provider in Thailand. SF has a stronger business profile in our assessment, taking into account its stronger contractual revenue visibility than JWD and higher EBITDAR margin due to its ability to pass-on more of its operating costs to its tenants. In addition, SF is cushioned from the impact of an economic downturn because of its contractual rental income and well spread-out lease maturities. However SF's financial profile is weaker than JWD's, which counterbalances its business strengths, resulting in both companies being rated at the same level.

SF is rated one notch lower than the 'bbb+(tha)' Standalone Credit Profile of IRPC Public Company Limited (IRPC, A(tha)/Stable), to reflect SF's weaker financial profile. Both companies have a similar business risk because, although SF has smaller operating scale than IRPC, this is compensated by the greater stability of its cash flows versus the susceptibility of IRPCs cash flows to commodity price cycles.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue growth of 6%-7% in 2019, and 1.5%-2.0% a year in 2020-2021

- EBITDAR margin at 43%-44%

- Aggregate capex of THB1.4 billion-1.5 billion (including maintenance capex) in 2019-2021

- Dividend receipts of about THB200 million a year from Mega Bangna in 2019-2021

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- FFO adjusted net leverage sustained below 5.0x

- FFO fixed-charge coverage sustained above 4.5x (1H19: 4.4x)

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- FFO adjusted net leverage sustained above 7.0x

- FFO fixed-charge coverage sustained below 3.0x

Fitch has moved to FFO-based leverage and coverage metrics for SF, from EBITDAR-based metrics previously, in order to better align with metrics used to assess its domestic peers.

LIQUIDITY AND DEBT STRUCTURE

Manageable Refinancing Risk: SF's total debt (excluding lease liabilities) at end-June 2019 was THB2.6 billion. Over the 12 months from end-June 2019, THB1.2 billion of debt will mature including unsecured debentures of THB500 million, long-term loans of THB222 million, and short-term loans of THB525 million. SF's liquidity is supported by cash and liquid investments (Fitch defined) of THB60 million, undrawn committed bank facilities of THB212 million and undrawn but uncommitted bank facilities of THB912 million at end-June 2019. The large majority of SF's debt is unsecured, and consequently its portfolio of shopping centres is largely unencumbered, with a book value of THB10.5 billion as of 30 June 2019. This should allow SF to comfortably access domestic secured-debt markets even in an economic downturn.

SUMMARY OF FINANCIAL ADJUSTMENTS

- Other operating income and non-operating income deducted from revenues

-Non-cash realised unearned rental income excluded and other operating income included in calculation of EBITDAR

-Finance cost on leases included in interest expense

-Change in short-term investment, change in amount due to/from related parties, finance cost and amortisation of finance lease liabilities excluded from change in working capital

Additional information is available on www.fitchratings.com