The upgrade reflects Fitch's reassessment of SF's linkages with its stronger 97.3% parent, Central Pattana Public Company Limited (CPN). We assess CPN's legal incentive to provide support to SF as 'Medium', strategic incentive as 'Weak' and operational incentive as 'Medium'. This leads to a two-notch uplift over SF's 'bbb-' Standalone Credit Profile (SCP).
KEY RATING DRIVERS
'Medium' Legal Incentive: We have applied a variation under our Parent and Subsidiary Linkage Rating Criteria to recognise the high financial integration between SF and its parent and assesses the strength of legal incentive to provide support as 'Medium'. CPN is acquiring shares in SF that it does not own via a tender offer and expects to delist the company by end-May 2022. We expect linkages between CPN and SF to strengthen after the delisting, as the parent will, over time, provide most of SF's funding via intercompany loans. Thus, CPN will not need to provide any explicit legal support to SF's external debt.
'Medium' Operational, 'Weak' Strategic Incentives: We assess the operational incentive for CPN to provide support to SF as 'Medium', based on fully integrated management decisions and branding, with the companies sharing a common management structure and key executive positions. CPN is involved in SF's daily operations and its medium- to long-term strategy. However, there are limited operational synergies in terms of avoidance costs of SF to the parent.
We believe SF's 49%-owned Mega Bangna shopping mall and associated landbank is of strategic importance to CPN in the long term. However, SF, including the joint venture, currently contributes less than 5% of CPN's EBITDA and we do not expect this to change in the next two years. This leads us to assess the strategic incentive for CPN to support SF as 'Weak'.
Deleveraging Supports SCP: We expect SF's net debt/EBITDA to decrease to about 7.0x in 2022 and 5.0x-5.5x in 2023 (2021: 8.4x). This should be supported by stronger cash flow from lower rental rebates following the relaxation of Covid-19 pandemic-led measures. We expect this to see revenue rise by close to 30% in 2022, and a further 20% in 2023 following the opening of Marche 55, a mixed-use project. We believe SF has sufficient rating headroom to execute its expansion plans of opening one or two shopping centres a year from 2024.
The Marche 55 project, a redevelopment of SF's Thong Lor 4 centre, aims to capture rising demand and the area's rental growth potential. The project is located in a prime area of Bangkok mid-town and in proximity to popular night life and shopping districts. It consists of office and retail space, with a gross leasable retail area of about 10,000 square metres (sqm). This is about three times larger than the old centre.
Improving EBITDA Margin: We forecast the EBITDA margin to improve to 34% in 2022. This should be driven by the termination of a loss-making centre, cost savings from lower personnel expenses after SF's shift to common management with CPN and higher revenue. However, the EBITDA margin is likely to soften to 32% in 2023 amid rising operating as well as marketing and promotional costs, with activity normalising to pre-pandemic levels. We also expect Marche 55 to weigh down the margin in its early years of operation, as it will take time to ramp up.
Healthy Fixed-Charge Coverage: Fixed-charge coverage is likely to stay at above 2.0x over the medium term. This ratio includes coverage of SF's interest costs and land lease expenses, which account for about 20% of operating costs. We have not factored in strict pandemic-related lockdowns in the next 12-18 months given Thailand's rising vaccination rates and heard immunity to Covid-19. Fixed charge cover is also supported by SF's earnings recovery outpacing rising interest expenses from the debt-funded Marche 55 project construction.
Defensive Tenants Mitigate Risk: SF's top-10 tenants - which accounted for around 20%-25% of revenue in 2020-2021 - comprise mostly supermarkets with healthy business profiles, mitigating risks stemming from pandemic-led closures. This counterbalances SF high domestic exposure to small retailers that required rental discounts and lease terminations. SF maintained occupancy at 88%-89% during the pandemic.
DERIVATION SUMMARY
SF is a leading community-mall developer in Thailand. Its closest rated peer is JWD InfoLogistics Public Company Limited (BBB-(tha)/Stable), a leading full-service land-based logistics provider in Thailand. SF has higher earnings visibility from long-term contracts with the tenants, but has been significantly affected by the pandemic due to the large rental rebates given to tenants and inflexible land rent. SF's recovery, nonetheless, has been fast, supported by its tenant mix, of which about half are restaurants and supermarkets providing daily essentials.
In comparison, JWD's business integration in logistic services and well-diversified customer base have provided a good cushion in the downturn and have compensated for its lower earnings visibility. JWD has lower leverage, but SF has additional financing flexibility by virtue of low net debt as a percentage of investment properties at market value. This leads us to assess SF's SCP at the same level as JWD's National Long-Term rating.
SF's SCP is one notch lower than the 'bbb(tha)' SCP of IRPC Public Company Limited (A-(tha)/Stable). This reflects SF's weaker financial profile over the medium term. Both companies have similar business risk; SF's smaller operating scale is compensated by better cash flow sustainability, versus the susceptibility of IRPC's cash flow to commodity price cycles.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Revenue growth of about 27% in 2022, 23% in 2023 and 10% in 2024
- New mixed-use project to open at the beginning of 2023
- EBITDA margin improving to 32%-34% in 2022-2024.
- Capex of THB420 million in 2022, mainly for the mixed-use project, THB146 million in 2023 and THB440 million in 2024, mainly for land lease extensions
- No capex is assumed for new uncommitted projects
- Dividend receipts from Mega Bangna of THB126 million in 2022, THB199 million in 2023 and THB255 million in 2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Stronger linkage with CPN
- FFO net leverage sustained below 6.0x (2021: 7.8x) or net debt/EBITDA below 5.5x
- FFO fixed-charge coverage or EBITDAR/gross interest paid + rents sustained above 2.0x (2021: 2.4x)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Weaker linkage with CPN
- FFO net leverage at above 8.0x or net debt/EBITDA at above 7.5x for a sustained period
- FFO fixed-charge coverage EBITDAR/gross interest paid + rents at below 1.5x for a sustained period
LIQUIDITY AND DEBT STRUCTURE
Refinanced by Shareholder Loans: Total debt at end-2021 was THB3.7 billion, of which THB2.0 billion matured in the next 12 months. CPN plans to refinance all of SF's debt, except bonds maturing in November 2022, using shareholder loans after it completes the delisting of SF. SF's financial management will then be carried out by the group's central treasury. SF's financing need, including the redemption of the maturing bonds, will be mainly supported by shareholder loans.
ISSUER PROFILE
SF is Thailand's leading community mall developer. It had 18 shopping centres at end-March 2022, mainly in Bangkok and suburbs, with total gross land area of 209,759sqm and one 201,491sqm mega centre, Mega Bangna, under a 49%-owned joint venture with IKANO Group. SF is a 97.3%-owned subsidiary of Central Pattana Group, Thailand's largest retail property developer.
Criteria Variation
A variation was applied to the Parent and Subsidiary Linkage Rating Criteria to account for substantial intercompany loans of more than 70% from CPN to SF. This leads to an overall legal incentive of 'Medium' for the stronger parent to provide support.
SUMMARY OF FINANCIAL ADJUSTMENTS
- Rent paid under SF's account, which was recorded as a repayment of finance lease liabilities under the audited account, is included in cost of services, while finance costs on recording investment property under capital leases are removed from expenses in the income statement
- We deducted other operating income and non-operating income from revenue
- We excluded non-cash realised unearned rental income and included other operating income in calculating EBITDA
- We excluded the change in short-term investments and amounts due to and from related parties from change in working capital.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SF's rating incorporates a two-notch uplift to reflect support from its stronger parent, CPN.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings