Bangkok--10 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has today revised the rating Outlook on Thailand-based Land and Houses Public Company Limited (LH) to Stable from Negative. At the same time, Fitch has affirmed LH’s ‘A-(tha)’ (A minus(tha)) National Long-term rating and ‘F2(tha)’ National Short-term rating.
The revision of the Outlook to Stable is based on LH’s better-than-expected cash flow management in 2007, despite high dividend payouts and investments in other businesses. This has now helped mitigate concerns on higher leverage risk, which previously resulted in a negative revision of the Outlook in November 2006. Fitch also expects a more favourable outlook for the single detached housing (SDH) sector, and LH’s ability to gain market share from small SDH developers to support the company’s earnings growth and leverage outlook in 2008.
During the first 9 months of 2007, LH’s net debt reduced to THB12.1 billion, from THB13.2bn at end-2006, while its net debt to EBITDA ratio improved to 3.0x from 3.6x at end-2006. This was largely achieved by the company’s more conservative project expansion in 2007, which resulted in moderate land acquisition and lower scale of construction costs, as well as its improved operating performance.
LH’s Q407 results are likely to remain strong, while it should pose further declines in net debt and financial leverage. Despite an expected increase in project expansion in 2008, as well as the remained high dividend payout of around 80% and funding required for investments in other businesses, Fitch views LH’s stronger cash flow from operations and a potential liquidation of assets to further reduce net debt and improve its net debt-to-EBITDA ratio, to be more consistent with the current credit metric, by end-2008. Nevertheless, a significant increase in net debt and a prolonged high financial leverage of over 3.0x could negatively affect the ratings.
LH’s ratings reflect its dominant position in the residential sector, its strong brand recognition and its experienced management team. LH is the largest and strongest residential developer in Thailand, benefiting from its extensive land inventory and economies of scale from its large-scale pre-built projects in Bangkok’s prime residential areas. LH also has solid balance sheet and relatively strong cash flow generating capability. Nonetheless, the ratings take into account the cyclical nature of the residential sector. Other key operational risks include continued margin pressure due to the rise in land and construction costs. LH’s diversification into the retail banking business also poses medium term risks given its short track record in financial services. LH injected a further THB301 million of capital in Land and Houses Retail Bank Public Company Limited in 2007.