OREANDA-NEWS. Fitch Ratings (Thailand) Limited has revised the Outlook on AP (Thailand) Public Company Limited's (AP) rating to Stable from Negative. At the same time, the agency has affirmed the property developer's National Long-Term Rating at 'BBB+(tha)' and National Short-Term Rating at 'F2(tha)'.

The Outlook revision reflects Fitch's expectation that the improvement in AP's EBITDA margin to above 16% since 2014 would be sustained for the next 18 months. Fitch also expects AP's financial leverage, measured by net debt/inventory, to improve to below 46% in 2016 due to lower land acquisitions and project development costs.

KEY RATING DRIVERS

Margin Improvement: Fitch expects AP to be able to maintain EBITDA margin at about 16%-17% in 2015-2016, supported by the company's cost and expense controls and additional service income from its JVs with Mitsubishi Estate Group. AP holds 51% in each of these ventures. AP's EBITDA margin has improved to 16.6% in 1H15 from a trough of 15% in 2013. AP is the only one among Thailand's five biggest property developers that maintained its margin in 1H15, with the others' margins narrowing due to intensified competition amid weak market sentiment.

Softer Revenue Growth: Fitch expects AP's revenue to grow at a mid-single-digit pace in 2015 and be relatively stable in 2016; this is after three consecutive years of double-digit growth since 2012. We expect AP's revenue in 2H15 to be relatively flat compared with a high base in 2H14, partly offsetting the high growth of 12.5% in 1H15. Thailand's property market this year is likely to face weak demand and high competition due to high market inventory, notwithstanding the recently announced stimulus measures from the government.

Deleveraging in 2016: AP's net debt/inventory is likely to remain high at the current level of 47%-48% in 2015, but Fitch expects it to come down to below 46% in 2016 due to lower working capital. Leverage in 2015 would mainly be driven by higher land acquisitions, increasing working capital for project developments, and cash injections to JV projects.

Strong Market Position: AP is one of the leading residential property developers in Thailand, ranking fourth in terms of revenue in 2014. Its well-diversified portfolio by property type, location, and customer base should support the company's revenue growth and help reduce volatility of its cash flow. Fitch expects AP to maintain its strong market position - especially in the middle-income and upper middle-income townhouse and condominium segment - over the next five years.

Volatile Cash Flow: Almost all of AP's earnings are generated from property development activities, resulting in more volatile and less predictable operating cash flow. The company is exposed to the cyclical nature of the property market, intense competition, and a rising supply of condominiums in and around Bangkok.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for AP include;
- Revenue to grow at a mid-single-digit pace in 2015 and be stable in 2016;
- Relatively stable gross margin for property development in 2015-2016;
- Slight increase in the ratio of selling, general and administrative expenses to revenue in 2015 and remain at around that level in 2016;
- Increase in revenue contribution from low-rise projects to about 53%-55% in 2015-2016;
- Land acquisitions of about THB8bn in 2015 and THB5bn in 2016.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include
- An improvement in EBITDA margin to above 25% (1H15: 16.6%), and
- An improvement in financial leverage (net debt to inventory) to below 45% (1H14: 47.3%) on a sustained basis.

Nonetheless, a positive rating action is unlikely over the next 12-18 months, given Fitch's expectation that its margin will stay at the current level.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Further deterioration of EBITDA margin to below 15%, or
- Weaker-than-expected presales, or
- Aggressive project expansion and land acquisitions leading to a sharp increase in financial leverage, with net debt to inventory sustained at above 50%.