Tris maintains sable 'BBB-' rating for Syntec

The rating reflects the company’s position as a market leader in the construction of high-rise buildings, as well as its effective cost controls and strong balance sheet.
These strengths are partially offset by the cyclical nature of the engineering and construction industry, intense competition, relatively low business diversity and the company’s exposure to customer credit risk.
Syntec’s earnings are also vulnerable to rising labour and raw material costs since most of its projects are under fixed-price contracts.
The “stable” outlook reflects the expectation that Syntec will sustain its competitive position in the private construction segment. Its operating performance is expected to recover late this year once revenues from new contracts with higher profit margins are recognised. Should Syntec fail to improve its operating performance or maintain leverage at an acceptable level, there may be increasing pressure for a rating downgrade.
Tris reported that Syntec was established in 1988. The company is a medium-sized general contractor, specialising in high-rise buildings. Most of its clients are in the private sector in industries such as residential and retail property development, hotels and manufacturing.
Profitability in the private construction sector is usually higher than in the public sector. However, private sector projects are more sensitive to economic conditions, so the company is more exposed to a potential decline in construction demand during an economic downturn.
Syntec is also exposed to customer credit risk. The ability to screen and maintain customers with good credit quality is one of its key success factors. During the past few years, Syntec has built a reputation for construction quality and reliability, leading to several repeat customers such as Supalai, Major Development and Bangkok Hospital Group.
As with other construction companies, Syntec is exposed to the volatility of raw materials prices since most of its contracts are fixed-price. The company tries to mitigate this risk by locking in raw materials prices whenever possible and reducing waste. It closely monitors construction progress, which helps reduce the likelihood of a huge unexpected loss when each project ends. As of March, it had 27 projects on hand. The backlog stood at Bt6.48 billion, up 7 per cent year-on-year. The current backlog is equivalent to 1.37 times Syntec’s total revenue in 2011.
Syntec’s operating performance in 2011 was weaker than expected. Without a reversal of rehabilitation debts worth Bt82 million, net profit would have fallen below Bt10 million, the smallest in six years. There were several reasons for the weak operating performance – revenue was lower than expected due to the severe flooding in the last quarter, several luxury condominium projects under construction posted cost overruns, and Syntec made some provision for bad debts.
Last year, Syntec set aside Bt138 million as a provision for bad debts, mainly due to the Baan Ua-Arthorn projects. Its operating margin before depreciation and amortisation expenses dropped to 1.8 per cent from 4.12 per cent in 2010. The pressure on the operating margin continued through the first quarter of this year, as the operating margin dropped to -2.33 per cent.
Although Syntec’s construction sites were not flooded, the flooding caused delays in the completion of several of the its projects. It incurred additional on-site overhead costs. The implementation of the Bt300 daily minimum wage scheme in April 2012 is also expected to weaken its profitability, since a large portion of its backlog comprises projects that were signed before 2012 under fixed-price contracts.
The company will have to absorb the cost increases in its old projects.
The operating margin is expected to recover late this year, as most of the projects showing cost overruns will be completed. New project revenue streams will also start to be recognised. Since the new orders, with contracts signed this year, incorporate the higher minimum wages, they are more profitable than the older projects in the backlog. As of March, 28 per cent of Syntec’s backlog incorporated the higher minimum wages in the pricing.
Despite the weak operating performance over the past two years, Syntec has maintained a strong balance sheet and adequate cashflow. As of March, total debt was Bt661 million, down from Bt703 million last year. Unrestricted cash and short-term investments stood at Bt275 million, or 42 per cent of outstanding debts.
The company’s capital structure was strong with total debt to capitalisation at 22.77 per cent. Funds from operations to total debt in the first quarter was 11.13 per cent (non-annualised) and is expected to improve in the second half, as the operating margin improves.
Going forward, the company plans to invest about Bt1 billion-Bt1.2 billion in serviced apartments over five years. This will cause debt to rise. However, the company is expected to maintain debt to capitalisation at below 40 per cent during the period.