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Fitch Assigns WHA's New Debentures 'BBB+(tha)' Rating
April 20, 2017 / 7:16 AM / 3 months ago

Fitch Assigns WHA's New Debentures 'BBB+(tha)' Rating

15 Min Read

(The following statement was released by the rating agency) BANGKOK, April 20 (Fitch) Fitch Ratings (Thailand) Limited has assigned a 'BBB+(tha)' National Long-Term Rating to WHA Corporation Public Company Limited's (WHA, BBB+(tha)/Negative) new senior unsecured debentures of up to THB3 billion due in 2020. The debentures are rated at the same level as WHA's National Long-Term Rating, as they represent the company's direct, unconditional, unsecured and unsubordinated obligations. The proceeds of the debentures will be used to repay the maturing bonds and fund working capital and capex requirements. KEY RATING DRIVERS Rising Project Development Cost: The Negative Outlook reflects the remaining challenge for WHA Corporation Public Company Limited (WHA) to deleverage as planned, given its increases in project-development cost as well as overseas investment to about THB7.5 billion per year in 2017-2019. Fitch expects FFO-adjusted leverage to rise in 2017, despite lower debt, before decreasing to the range of 5.3x-5.5x over the medium term. Successful Asset-Disposal Plan: WHA carried out its asset-disposal plan and a debt reduction of THB6 billion in 2016, leading to a decrease in FFO-adjusted leverage to 5.4x by end-2016. The recent 30% spin-off of its utility business has reduced the debt by a further THB5 billion by April 2017. More Integrated Business Model: The acquisition of Hemaraj Land and Development Plc. (Hemaraj) has strengthened WHA's market position in the industrial property business, supporting its leadership in the development of both premium built-to-suit warehouses for lease and industrial estates in Thailand. WHA plans to generate more recurring revenue by providing more integrated services for its customers in the industrial estates, eg data centre and managed services, internet services and IT outsourcing services. WHA's revenue has more than doubled while the proportion of recurring revenue to total revenue should rise to 30%-35% from 10% pre-acquisition over the medium term. Larger Exposure to Cyclicality: The expansion into industrial estate development has increased WHA's exposure to volatility of land sales and cyclicality of property demand, as well as stiffer competition. WHA's original business of developing premium built-to-suit warehouses for lease had limited its exposure to property market cycles, because the warehouses are pre-leased and have long-term contracts. The competition in this niche market is also relatively low. DERIVATION SUMMARY WHA has higher revenue and EBITDAR, and a more integrated business model than its property-investment peers. However, it also faces high development risk and exposure to volatility of land sales from its industrial estate business. TICON Freehold and Leasehold Real Estate Investment Trust (TREIT, 'A-(tha)'/Negative), an industrial property REIT, is comparable with WHA's ready-built factories and warehouses for rent business. However, TREIT has no development exposure, with significantly lower financial leverage and higher financial coverage than WHA. This warrants TREIT's higher rating. JWD InfoLogistics Plc. (JWD, 'BBB+(tha)'/Stable), a full-service in-land logistics provider, is not a property-investment company, but has similar characteristics. Unlike the pure property rental business, JWD's revenue is still exposed to the volume and activities of customers, although its earnings are somewhat supported by long-term contracts. WHA and JWD are rated at the same level, with JWD's lower financial leverage and higher financial coverage. The business profile of Siam Future Development Public Company Limited's (SF, 'BBB(tha)'/Stable), as a community mall developer, is similar to the rental business of WHA but in a different industry segment, i.e. retail versus industrial. With a similar range of financial leverage, WHA is rated higher than SF. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Marginal growth in rental and service income in 2017, given large sales of investment properties in 2016, and 15%-20% growth per year in 2018 and 2019 from the growing water business and new digital infrastructure business; - An increase in land transfer to 1,300-1,350 rai a year in 2017-2019; - Sales of investment properties of THB3.5 billion-4.5 billion (excluding sales by JVs) per year in 2017-2019; - EBITDAR margin to narrow to 38%-40% in 2017-2019 due to lower high-margin sales of Hemaraj's investment properties; - Capex spending - including project development cost and investment in power affiliates - of about THB7.5 billion per year in 2017-2019. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action The consolidated FFO-adjusted leverage at below 5.5x on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action An aggressive investment, high dividend payment or weaker-than-expected revenue and EBITDA margin resulting in a consolidated FFO-adjusted leverage unlikely to decrease to below 5.5x from 2018 onwards. LIQUIDITY Manageable Liquidity: Out of THB12 billion debt to be due in 2017, THB5 billion has already been repaid by the proceeds from the 30% spin-off of the group's utilities business carried out in April 2017. The remainder should be mainly supported by cash balance and short-term investment of THB4.7 billion as well as undrawn committed facilities of THB2.1 billion at end-2016. The company also has the ability to access the capital markets. Contact: Primary Analyst Somruedee Chaiworarat Director +66 2108 0160 Fitch Ratings (Thailand) Limited Level 17, Park Ventures, 57 Wireless Road, Lumpini, Patumwan, Bangkok 10330 Secondary Analyst Nichaya Seamanontaprinya Associate Director +66 2108 0161 Committee Chairperson Jeong Min Pak Senior Director +82 2 3278 8360 Date of Relevant Rating Committee: 17 April 2017 Summary of Financial Statement Adjustments - -There are adjustments on cost of sales of investment properties and industrial estate land of Hemaraj to remove a portion of cost incurred from revaluation to fair value upon the acquisition by WHA in order to reflect the actual cost of Hemaraj with total amount of THB2 billion. - There are adjustments on debt at Hemaraj level to remove an effect of revaluation to fair value (THB368 million) upon acquisition by WHA. -There are reclassifications of purchase of investment properties and proceeds from sales of investment properties under cash flow statement to working capital change, instead of cash flow for investing. The deduction of gain on sale of investment properties as adjustment items under cash flow statement is also reclassified to working-capital change. This is to have the classification of items in the cash flow statement consistent with the income statement, where sales of investment properties and cost of investment properties sold are presented as sales and cost of goods sold from normal business, not as a one-line gain/loss on sales of fixed assets in other income. - Capitalised interest expense of THB20 million presented under cash flow from investing activities are reclassified to interest paid in calculation of FFO. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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