KEY RATING DRIVERS
Maintaining High Financial Leverage: Fitch expects SF's adjusted net debt/EBITDAR to increase to 5.5x-6.5x (1H18: 4.5x) over the next three years, driven by capex for expansions of about THB1.7 billion during 2018-2020. Cash flow will also be boosted over the same period with Mega Bangna, its 49%-owned joint venture, increasing its dividend distribution to SF to about THB200 million in 2018 (from about THB50 million in 2017), after most of Mega Bangna's expansion plan is completed. However, SF has increased its dividend payment, and hence leverage is likely to be at the upper end for its rating level.
Higher Occupancy Supporting Growth: SF should achieve single-digit revenue growth a year in 2018-2020 despite the termination of some existing centres representing about 13% of total existing gross leasable area (GLA) during 2018-2019. Revenue growth stems from higher occupancy and additional GLA from expansion. SF launched the first expansion phase of Marketplace Nanglinchee, an existing centre in downtown Bangkok, in 4Q17 and will launch the second phase in 4Q18 as well as a new centre, Marketplace Dusit in 2019, totalling 6%-7% of its existing total GLA. In 2018, SF has also replaced the major tenants in its two centres for about 6% of its total GLA. Fitch expects the average occupancy rate of SF's portfolio to be about 88% in 2018 and rise to about 94% in 2019.
Strong Market Position: SF is a leading developer of Thai medium-sized open-air shopping centres. Its large portfolio, significant experience and expertise give SF an advantage over its peers. SF has a high-quality and diversified shopping-centre portfolio in terms of location. Although some community malls have not been successful, their occupancy remains higher than 80%. SF's current strategy is to focus more on expansion of existing centres with proven performance. On the other hand, SF has tried to change the mall concept and tenant mix of weaker centres to attract more traffic.
Cash Flow Visibility: SF has long-term leases on about 60% of its total GLA, which contribute about 25% of total recurring income. Its anchor tenants are high-profile and diversified. The space rented to its five largest tenants accounts for about 38% of total GLA, while the largest tenant - occupying 17% of total GLA - is a related company. Additionally, rental from tenants provide a buffer against the immediate impact of weak consumption and spending.
Secured Debt to Increase: The company plans to use project financing loans for its renovation and expansion projects in 2018-2020. Therefore, secured debt is likely to increase. Fitch expects SF's secured interest-bearing debt-to-EBITDA to be 1.5x-2.0x in 2020, which should leave bondholders unimpaired. A higher-than-expected increase in secured debt, to the extent that secured debt-to-EBITDA rises above 2.0x, nonetheless, is the level at which senior unsecured creditors' interests are materially subordinated to interests of secured or prior-ranking creditors. SF's debenture rating could, therefore, be downgraded, irrespective of the National Long-Term Rating.
DERIVATION SUMMARY
SF is a leading community mall developer in Thailand. Its closest industry peer is TICON Freehold and Leasehold Real Estate Investment Trust's (TREIT, A/Stable), the largest industrial REIT in Thailand, whose properties are mainly sponsored by the TICON group. TREIT has a property portfolio that is 3x as large as and better tenant diversification than SF's. TREIT has a significantly higher EBITDA margin of 75%-80%, compared with SF's 58% (excluding utilities). In addition, SF has development risk exposure whereas TREIT does not. Therefore, TREIT is rated higher than SF.
JWD InfoLogistics Plc (JWD, BBB+(tha)/Negative), a leading full-service in-land logistics provider in Thailand, is larger than SF in revenue and EBITDAR size while its EBITDAR margins are lower. SF has higher earnings visibility and more cushion against an economic downturn than JWD. Nonetheless, JWD's customers are more diversified by industry than SF's, which are mostly food retail stores, restaurants and entertainment services. Both have large investment plans over the next one to two years and are likely to see increasing financial leverage. SFs financial leverage is likely to remain higher than that of JWD. Therefore, JWD has a higher rating.
Compared with IRPC Public Company Limited (IRPC, A-(tha)/Stable, standalone credit profile of BBB+(tha)), the third-largest oil refiner and the third-largest petrochemicals producer in Thailand, SF has significantly smaller operating scale, revenue and EBITDAR. IRPC has significantly higher earnings volatility than SF due to its exposure to commodity risk. However, SF's financial leverage is significantly higher than IRPC's. SF is, therefore, rated lower than IRPC based on IRPC's standalone credit profile.
KEY ASSUMPTIONS
Fitch's Key Assumptions within our Rating Case for the Issuer
- 2%-4% revenue growth a year in 2018-2019, and no growth in 2020
- EBITDAR margin at 44%-45%
- Total capex of about THB1.7 billion (including maintenance capex) in 2018-2020
- Dividend of about THB200 million a year from Mega Bangna in 2018-2020
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Adjusted net debt/EBITDAR below 4.5x on a sustained basis (1H18: 4.5x)
- Substantial improvement in recurring income and rental-derived EBITDA (including dividend from Mega Bangna) /interest expense above 4.5x on a sustained basis (1H18: 4.6x)
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Adjusted net debt/EBITDAR at above 6.5x on a sustained basis
- Deteriorating recurring income with rental-derived EBITDA (including dividend from Mega Bangna) /interest expense below 3.0x on a sustained basis.
LIQUIDITY
Adequate Liquidity: SF's total debt (excluding lease liabilities) at end-June 2018 was THB2.2 billion. Over the 12 months from end-June 2018, THB753 million of debt will mature. At end-June 2018 SF's liquidity was supported by a cash balance and investments of THB151 million, and undrawn committed bank facilities of THB1 billion. About 45% of total debt (excluding lease liabilities) at end-June 2018 were unsecured debentures while about 21% were secured loans.