Fitch Ratings (Thailand) has revised its outlook on property developer AP (Thailand) Public Company Limited’s (AP) rating to negative from stable.
According to the company, the outlook revision reflects Fitch’s expectation that AP’s EBITDA margin would remain weak in 2014-2015.
Continued weakness in its margin or further deterioration in profitability would hurt AP’s credit profile more than previously expected, even though Fitch expects AP’s leverage to improve in 2015 due to lower working capital for project construction.
AP’s EBITDA margin decreased to 15 percent in 2013 from 24 percent in 2010, mainly due to higher construction costs and sales, general and administrative expenses, and lower contribution from high-margin condominium projects.
Profitability was also weaker than Fitch expected in 1H14.
Almost all of AP’s earnings are generated from property development activities, resulting in operating cash flow that is more volatile and less predictable. The company is exposed to the cyclical nature of property market, intense competition, and increasing supply of condominiums in and around Bangkok.
Fitch expects AP’s revenue growth to soften to a high single-digit rate in 2014-2015 from 16 percent in 2013. Presales (after cancellations) from low-rise residential properties rose by 38 percent between January and September 2014, while high-rise property sales dropped by 10 percent.
Fitch expects the residential property market sentiment, as well as AP’s presales, to improve in 2H14. AP’s condominium project development costs are likely to decrease in 2014-2015 because all of the condominiums AP has launched are joint ventures.
Diversified Project Portfolio: AP is a pure residential property developer with well-diversified portfolio in terms of property type and location. AP focuses on condominiums and townhouses for the middle-income and upper middle-income demographic, and has recently expanded into condominiums for low-income segment and single detached houses for the high income demographic The well-balanced portion of its projects in low-rise homes is likely to help reduce the volatility of cash flow because they have a shorter construction period.
AP was one of Thailand’s five largest residential property developers in term of revenue in 2013. Fitch expects AP to maintain its strong market position over the next five years due to its well-established brands in the condominium and townhouse markets in Bangkok and nearby cities.
Andrew Batt, International Group Editor of PropertyGuru Group, wrote this story. To contact him about this or other stories email andrew@propertyguru.com.sg
