Fitch Affirms Siam Future at 'BBB+(tha)'; Withdraws Rating

The National Long-Term Rating incorporates a two-notch uplift from SF's Standalone Credit Profile (SCP) for support from its stronger 99.7% parent, Central Pattana Public Company Limited (CPN). The support is based on our assessment of CPN's 'Medium' legal and operational incentives and 'Weak' strategic incentive to support its subsidiary.

Simultaneously, Fitch has chosen to withdraw the ratings of SF for commercial reasons.

KEY RATING DRIVERS
'Medium' Legal Incentive: We have applied a variation under our Parent and Subsidiary Linkage Rating Criteria to recognise the high financial integration between SF and its parent and assess the strength of CPN's legal incentive to provide support to SF as 'Medium'. CPN has repaid most of SF's external debt by providing intercompany loans to the subsidiary after SF's delisting from the Stock Exchange of Thailand on 1 June 2022. Thus, CPN will not need to provide any explicit legal support to SF's external debt.

'Medium' Operational, 'Weak' Strategic Incentives: We assess the operational incentive for CPN to provide support to SF as 'Medium', based on fully integrated management decisions and branding, with the companies sharing a common management structure and key executive positions. CPN is involved in SF's daily operations and its medium- to long-term strategy. However, there are limited operational synergies in terms of benefit provided by SF to the parent on cost avoidance that may have otherwise resulted in an operational incentive assessment of 'Strong'.

We believe SF's 49%-owned joint venture - the Mega Bangna shopping mall - and associated landbank is of strategic long-term importance to CPN. However, SF, including the joint venture, contributes less than 5% of CPN's EBITDA and we do not expect this to change in the next two years. This leads us to assess the strategic incentive for CPN to support SF as 'Weak'.

Deleveraging Supports SCP: We expect SF's EBITDA net leverage to decrease to 6.6x by end-2022 and 4.5x-5.5x in 2023 (2021: 8.4x). This should be supported by stronger cash flow from lower rental rebates after the return of normal economic activity from the effects of the Covid-19 pandemic. We expect revenue to increase by 27%-28% in 2022, and a further 23% in 2023, following the opening of Marche 55, a mixed-use project, scheduled in January 2023. We believe SF has sufficient rating headroom to execute its expansion plans of opening one or two shopping centres a year from 2024.

The Marche 55 project, a redevelopment of SF's Thong Lor 4 centre, aims to capture rising demand and the area's rental growth potential. The project, consisting of office and retail space, is in a prime area of Bangkok's mid-town and in proximity to popular night life and shopping districts. The retail space, which is operated by SF, has a gross leasable retail area of about 10,000 square metres (sqm). This is about three times larger than SF's old centre.

Improving EBITDA Margin: We expect SF's EBITDA margin to improve to about 36% in 2022-2023 (2021: 25%). This should be driven by the termination of a loss-making centre and cost efficiency from shared services with CPN group, including common management and key personnel. This is despite our expectation of a low margin at Marche 55 in its early years of operation, which is likely to take time to ramp up. We also expect SF to pass on a large majority of rising utility cost to tenants.

Healthy Fixed-Charge Coverage: EBITDAR fixed-charge coverage is likely to stay at above 2.0x over the medium term. This ratio includes coverage of SF's interest costs and land lease expenses, which account for about 25%-30% of operating costs. Fixed charge cover is also supported by SF's earnings recovery outpacing rising interest expenses from the debt-funded Marche 55 project construction.

Defensive Tenants Mitigate Risk: SF's top-10 tenants - which accounted for around 20%-25% of revenue in 2020-2021 - comprise mostly supermarkets with healthy business profiles, mitigating risks stemming from pandemic-led closures. This counterbalances SF high domestic exposure to small retailers that required rental discounts and lease terminations. SF maintained occupancy at 88%-89% during the pandemic.

DERIVATION SUMMARY
SF is a leading community-mall developer in Thailand. Its closest rated peer is JWD InfoLogistics Public Company Limited (BB+(tha)/Rating Watch Positive), a leading full-service land-based logistics provider in Thailand. SF's SCP is one-notch higher than that of JWD to reflect its higher earnings visibility from long-term tenant contracts, notwithstanding a temporary weakening in cash flow due to rebates offered during the pandemic, which disproportionately affected retail malls. JWD's business integration in logistic services and diversified customer base mitigates its shorter earnings visibility. We expect both issuers' leverage to converge in the next two years.

SF's SCP is one notch lower than the 'bbb(tha)' SCP of IRPC Public Company Limited (A-(tha)/Stable). This reflects SF's weaker financial profile over the medium term. Both companies have similar business risk; SF's smaller operating scale is compensated by better cash flow sustainability, versus the susceptibility of IRPC's cash flow to commodity price cycles.

KEY ASSUMPTIONS
Key Assumptions Within Our Rating Case for the Issuer:

• Revenue growth of about 27% in 2022, 23% in 2023 and 10% in 2024
• New mixed-use project to open at the beginning of 2023
• EBITDA margin improving to about 36% in 2022-2023 and 38%-39% in 2024.
• Capex of THB420 million in 2022, mainly for the mixed-use project, THB146 million in 2023 and

THB440 million in 2024, mainly for land lease extensions

• No capex assumed for new uncommitted projects
• Dividend receipts from Mega Bangna of THB126 million in 2022, THB199 million in 2023 and THB255

million in 2024

RATING SENSITIVITIES
No longer relevant as the ratings have been withdrawn.

LIQUIDITY AND DEBT STRUCTURE
Debt Repaid by Loans from Parent: SF's total debt at end-June 2022 was THB3.6 billion, of which THB710 million matured in the next 12 months, including THB458 million in bonds. Of the THB3.6 billion, THB2.1 billion comprised an intercompany loan from CPN. The bonds have also been repaid using a loan from the parent in mid-November 2022. CPN aims to complete refinancing of all SF's external debt via shareholder loans by end-2022. SF's financial management will then be carried out by the group's central treasury. SF's financing needs will be supported by shareholder loans.

ISSUER PROFILE
SF is Thailand's leading community-mall developer. It had 18 shopping centres at end-June 2022, mainly in Bangkok and suburbs, with total gross land area of 209,759 sqm and one 201,491 sqm mega centre, Mega Bangna, under a 49% joint venture with IKANO Group. SF is a 99.7%-owned subsidiary of CPN, Thailand's largest retail property developer and operator.

Criteria Variation
A variation was applied to the Parent and Subsidiary Linkage Rating Criteria to account for substantial intercompany loans of more than 70% from CPN to SF. This leads to an overall legal incentive of 'Medium' for the stronger parent to provide support, which is typically reserved for instances where a parent has provided corporate guarantees that cover between 20%-50% of the value of the subsidiary's debt.

SUMMARY OF FINANCIAL ADJUSTMENTS

• Rent paid under SF's account, which was recorded as a repayment of finance lease liabilities under the audited account, is included in cost of services, while finance costs on recording investment property under capital leases are removed from expenses in the income statement
• We deducted other operating income and non-operating income from revenue
• We excluded non-cash realised unearned rental income and included other operating income in calculating EBITDA
• We excluded the change in short-term investments and amounts due to and from related parties from change in working capital.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
SF's rating incorporates a two-notch uplift to reflect support from its stronger parent, CPN.

Additional information is available on www.fitchratings.com