Fitch Affirms Siam Future at 'BBB(tha)'; Outlook Stable

           Fitch Ratings (Thailand) Limited has affirmed Siam Future Development Public Company Limited's (SF) National Long-Term Rating at 'BBB(tha)' with a Stable Outlook, its National Short-Term Rating at 'F3(tha)' and its outstanding senior unsecured debentures at 'BBB(tha)'.

          KEY RATING DRIVERS
          Increasing Financial Leverage: Fitch expects SF's net adjusted debt/EBITDAR to rise above 5.5x (1H17: 5.3x) over the next three years, peaking in 2018 at 6.5x-7.0x. This is likely to be driven by its investment in expansion projects with total capex of about THB2 billion as well as our expectations of a low dividend payout from Mega Bangna, its 49%-owned joint venture. In order to reserve cash for its own expansion plan, the dividend distribution from Mega Bangna to SF is likely to remain at about THB50 million a year in 2017-2018 (2015: THB113 million).
          Slow Revenue Growth: Fitch expects revenue to be flat in 2017 followed by 5%-6% growth in 2018. We expect the occupancy rate of SF's portfolio in 2017 to be slightly lower than 90% due to the termination of anchor tenants in two centres as a result of a weak domestic economy. However, this is not likely to significantly affect SF's cash flow as monthly revenue from these anchor tenants is small because their rentals were already paid upfront when they signed the lease contracts. Positive rental reversions are likely across SF's well-performing centres. SF also plans to open the expansion phases of two existing shopping centres in late 2017 and 2018.
          Strong Market Position: SF is a leading developer of Thai medium-sized open-air shopping centres. SF's large portfolio, significant experience and expertise give it 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 has still been higher than 80%. SF's current strategy is to focus more on expansion of the existing centres with proven performance. On the other hand, SF has tried to change the mall concept and tenant mix of the weaker centres to attract more traffic.
          Cash Flow Visibility: SF has long-term leases for about 60% of its total gross leasable area (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, as SF earns on rental from the tenants, it is somewhat cushioned against the immediate impact of weak consumption and spending.

          DERIVATION SUMMARY
          SF is a leading community mall developer in Thailand. Its closest peer is TICON Freehold and Leasehold Real Estate Investment Trust (TREIT, A-(tha)/Negative), an industrial property REIT. Both have a similar property portfolio size and tenant diversification as well as high earnings visibility, supported by medium-to-long term contracts. However, SF still faces development exposure while TREIT does not. SF's EBITDAR margin of 56% (excluding utilities) is lower than TREIT's 78% due to higher operating and development costs. SF also has higher financial leverage than TREIT, although TREIT's financial leverage is likely to increase over the medium term. Therefore, TREIT has a higher rating than SF.
          SF and JWD InfoLogistics Public Company Limited (JWD, BBB+(tha)/Negative), a leading full-service in-land logistics provider in Thailand, have a similar EBITDAR size but JWD has lower financial leverage. SF has higher earnings visibility than JWD, whose revenue is exposed to the volume and activity of its customers. JWD's customers operate in significantly more diversified industries than SF's clients, which are mostly food retail stores, restaurants and entertainment services. Therefore, JWD is rated higher than SF.
          SF is much smaller than WHA Corporation Public Company Limited (WHA, BBB+(tha)/Negative) in terms of operating scale and EBITDAR size while both have a similar level of financial leverage. WHA is a leading developer of industrial estates and built-to-suit industrial properties for rent in Thailand. WHA has high earnings visibility in its premium warehouse-for-rent business while a larger portion of revenue is exposed to land sales volatility. Nonetheless, WHA's stronger business profile warrants its higher rating.

          KEY ASSUMPTIONS
          Fitch's key assumptions within our rating case for the issuer include:
          - Zero revenue growth in 2017, 5%-6% growth in 2018;
          - EBITDAR margin in the range of 44%-45%;
          - Total capex of about THB2 billion (including maintenance capex) in 2017-2019.
          - Dividend of THB50 million a year from Mega Bangna in 2017-2018 and THB200 million in 2019

          RATING SENSITIVITIES
          Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
          - Net adjusted debt/EBITDAR at below 4.5x on a sustained basis (1H17: 5.3x)
          -A substantial improvement in recurring income and EBITDA/interest expense to above 4.5x on a sustained basis (1H17: 3.8x) Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
          -Net adjusted debt/EBITDAR at above 6.5x on a sustained basis
          - Deteriorating recurring income with EBITDA/interest expense below 3.0x on a sustained basis

          LIQUIDITY
          Adequate Liquidity: SF's total debt (excluding lease liabilities) at end-June 2017 was THB1.9 billion. Over the 12 months from end-June 2017, THB1.4 billion of debt will mature, including THB700 million in bonds redeemed at maturity in July 2017. SF's liquidity was supported by a cash balance and investments of THB293 million, and undrawn committed bank facilities of THB1.8 billion at end-June 2017.
          Debt Structure: About 62% of total debt (excluding lease liabilities) at end-June 2017 were unsecured debentures while about 9% were secured loans. The company plans to use project financing loans for its renovation and expansion projects in 2017-2019. Therefore, secured debt is likely to increase. Fitch expects SF's secured interest-bearing debt to EBITDA to be in the range of 1.5x-2.0x in 2018-2019. A higher-than-expected increase in secured debt, which could jeopardise the recovery prospect of unsecured creditors, could negatively affect the bonds' issue ratings.

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