The “stable” outlook reflects TRIS Rating’s expectation that UV will be able to develop and deliver the property business as planned. The increasing leverage to finance the business expansion should be well structured to maintain sufficient liquidity.
TRIS Rating reported that UV was established in 1980 as a ZnO operator and the company diversified its operation to investment, focusing on the property industry in 2000. UV has invested in joint ventures with selective property developers and successfully launched 21 projects worth over Bt17 billion. In the second half of 2007, Adelfos injected Bt452 million into UV and acquired 51.6% of UV’s total shares, becoming the controlling shareholder. Adelfos is equally owned by Mr. Panot and Mr. Thapana Sirivadhanabhakdi, who also serve on the executive committees of UV. The company enhanced its strategy from investing in property development by increasing its holding in Grand Unity Development Co., Ltd. (GRAND U) from 33.3% to 60% and taking full control of GRAND U’s operation. In the past, GRAND U successfully operated various condominium projects that were managed by its partner, L.P.N. Development PLC. Moving forward, GRAND U will be an operating arm for residential project development under UV’s direction with its first project, U-Sabai Rama IV, launched in May 2008. Although UV already had key executives in the property business, the company plans to recruit more property team, including the project development, sales, and marketing teams, in order to increase its management capacity. The company set up Lertrattakarn Co., Ltd. in 2007 to develop its first office building project, under a 30-year land lease, located on Wireless road. Out of total saleable area, 47% will be subleased to TCC Luxury Hotel and Resort Co., Ltd. (TCCLH) to operate a 5-star hotel. UV is challenged to continuously launch and develop property projects and to complete the Wireless Square project in order to consistently generate future cash flow.
UV’s revenue from ZnO sales increased greatly in 2006 due to the triple increase in prices. ZnO prices remained high in 2007. The ZnO’s margin of earnings before interest, tax, depreciation and amortization (EBITDA) improved to 7%-10% during 2006-2008 compared with less than 5% in the past. In terms of cash, ZnO generated cash flow about Bt100 million during 2006-2007 compared with Bt10-Bt20 million in 2004-2005.
TRIS Rating said, UV’s financial profile is considered strong, though with low profitability, mainly due to its minimal debt. The operating margin before depreciation and amortization improved from 5.7% in 2005 to 8.1% in 2006 as ZnO margin increased and the company also recognized profits from the KRF projects. The margin gradually declined to 6.4% in 2007 and 5.5% in the first half of 2008 due to loss in the property business. Total debt to capitalization greatly improved from 12.7% in 2005 to 0.49% in June 2008. UV is expected to post a substantial increase in debt to finance project development by GRAND U and Lertrattakarn. In return, the property business will provide more contribution and stabilize the company earnings in the future. The ratios of EBITDA interest coverage and funds from operations (FFO) to total debt improved significantly. However, interest expenses are expected to increase along with the debt financing planned for property investment. UV is not expected to have liquidity problems, especially in the medium term, due to the well-structured financing plan. Lertrattakarn is structured to firstly utilize the cash support from TCCLH and loan from UV before drawing a bank loan which will save financing costs. GRAND U will secure financing for each project prior to project commencement. Having a strong major shareholder enables UV to access the favorable financing terms and conditions which lower the financing burden and give UV the flexibility to seek funding. Therefore, the major shareholder’s commitment to UV is the key factor supporting its credit profile.