Planned Bt1.2-billion AP debenture issue gets 'A-' rating from TRIS

At the same time, TRIS Rating affirmed the company and current issue ratings of AP at “A-” with “stable” outlook. 

AP will use the proceeds from the new debentures for working capital. 

TRIS said the ratings reflected AP’s proven track record in the residential property-development industry, stronger market presence in the downtown townhouse and condominium segments, and an improvement in product diversification. 

The strengths are partially offset by the cyclical nature of the property-development industry, a potential rise in construction-material prices, and upward pressure on leverage in the medium term, it said. 

The “stable” outlook reflects an expectation that AP will maintain high competitiveness in its core business franchise and will consistently be able to rebalance its product portfolio alongside market dynamics, TRIS said. The outlook is also based on the expectation that AP will continue to follow a prudent financial policy and bring down its debt-to-capitalisation ratio below 50 per cent in the medium term.

TRIS Rating said that for the first quarter of the year, AP’s revenue stood at Bt3.2 billion, up 44 per cent from the same period last year, driven by higher condominium transfers. TRIS expects AP to generate respectable revenue this year with limited exposure to lingering market concerns after the flood crisis. Most of AP’s low-rise projects are in inner-city Bangkok, which is considered safe from floods. In addition, AP expects to realise about Bt6 billion to Bt7 billion in revenue from high-rise projects in 2012. 

AP’s operating income before depreciation and amortisation as a percentage of revenue was 17.5 per cent in the first quarter of this year, down slightly from 19.9 per cent in 2011. Flood prevention and rising construction costs should have an impact on profit margins in the short run. 

Growing contribution from AP’s new lower-priced segments is also expected to exert some downward pressure on the otherwise relatively stable profit margins. This reflects higher market competition in the lower-priced segments from low-cost developers and buyers’ greater price sensitivity. However, TRIS Rating expects these pressures to be compensated by benefits AP derives from broader product diversity.

AP’s debt-to-capitalisation ratio at the end of March stood at 56.2 per cent. The high leverage level reflects a rise in land acquisitions and inventory build-up. AP’s balance sheet is expected gradually to improve in the medium term as the transfer and new-launch schedules, particularly in condominiums, resume their normal cycle.

Overall, TRIS Rating forecasts that the residential property sector will continue to be driven mainly by favourable economic growth prospects. The sales of low-rise units in non-flooded areas should be rather healthy. However, sales of projects in the formerly flooded areas will be lacklustre. 

A major clearance of inventories in the flooded areas is not expected until next year at the earliest. The industry’s growth momentum could be pulled back should flood threats return in the second half of this year when the rainy season arrives. 

Labour shortages have increasingly become a major concern for property developers, forcing several of them to opt for a pre-cast construction model, relying less on manpower. The increase in the minimum wage will put pressure on developers’ profit margins in the short run. However, past performance shows that most developers are capable of eventually passing on the cost rises to buyers, TRIS said.