JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the B2
corporate family rating of Alam Sutera Realty Tbk.
Moody’s has also affirmed the B2 backed senior unsecured rating of the 2020 notes and 2022 notes issued by Alam Synergy Pte. Ltd., a wholly owned subsidiary of Alam Sutera. The notes are guaranteed by Alam Sutera and most of its subsidiaries.
The rating outlook is ‘stable’, it said.
“The affirmation of Alam Sutera’s B2 ratings reflect its strong financial metrics in 2017 and our expectation that China Fortune Land Development will continue to buy land plots from the company at Pasar Kermis, contributing around IDR1.5 trillion to cash flows in 2018,” says Moody’s Vice President and Senior Analyst Jacintha Poh
“The incremental cash flow will compensate for Alam Sutera’s weak core marketing sales and support the company’s financial metrics within the thresholds of its B2 ratings level over the next 12-18 months,” adds Poh, who is also Moody’s Lead Analyst for Alam Sutera.
During 2017, Alam Sutera achieved strong revenue growth of 57 per cent to Rp 3.9 trillion, largely driven by its sale of land at Pasar Kermis to CFLD, where it recognized IDR1.4 trillion in revenue. Alam Sutera also recorded higher revenue from apartment sales (Rp 675 billion in 2017 versus Rp 156 billion in 2016) as it sold 1,524 apartment units from its Paddington
Heights and Kota Ayodhya projects; a sharp increase from the 157 apartment units sold in 2016.
Given the large land sales transactions, Alam Sutera’s financial metrics in 2017 were strong for its ratings. For 2017, the company’s adjusted debt/homebuilding EBITDA measured 3.3x and homebuilding EBIT/interest expense was at 3.6x.
Alam Sutera’s financial performance will be highly dependent on thesuccessful execution of its agreement with China Fortune Land Development Co., Ltd (CFLD). The deal requires Alam Sutera to sell a total of around 500 ha of its land bank at Pasar Kermis to CFLD from 2016-2021.
The land transactions between the two companies have progressed in line with Alam Sutera’s expectations, but the company remains exposed to the risk that CFLD may delay or cancel the sale of the land parcels. If such a situation occurs, Alam Sutera’s leverage and interest coverage ratios will weaken significantly.
For 2018, Alam Sutera’s target is to achieve marketing sales of around Rp 4 trillion, of which, around Rp 1.6 trillion will be from residential sales, IDR600 billion from commercial sales and Rp1.8 trillion from land sales to CFLD. Moody’s expects that Alam Sutera will achieve core
marketing sales of Rp1.6 trillion and complete its land sales to CFLD.
However, Alam Sutera’s financial metrics will likely weaken in 2018 — with adjusted debt/homebuilding EBITDA registering around 3.9x and homebuilding EBIT/interest expense at around 3.0x — based on Moody’s assessment that the company will increase capital spending to speed up land acquisitions in North Serpong for the next phase of development at
its Alam Sutera township.
Alam Sutera’s B2 ratings also reflect the company’s ownership of a large and low-cost land bank — which has allowed it to generate strong gross profit margins of above 50 per cent — as well as its proactive approach toward debt capital management.
However, the ratings are constrained by Alam Sutera’s small-scale and limited geographic diversity. The company is also exposed to the cyclical property sector, with limited contributions from the more stable, recurring income stream from its investment properties.
In 2017, Alam Sutera’s recurring revenue accounted for around 10 per cent of total revenue. Although Moody’s expects its recurring revenue to grow 5-10 per cent over the next 12-18 months, the company’s proportion of recurring revenue to total revenue will remain at around 10 per cent. Moody’s also estimates that its recurring EBIT will continue to cover less than 0.2x
of total reported interest expense.
“Alam Sutera’s notes are rated in line with its B2 corporate family rating because note holders are not exposed to either legal or structural subordination risk,” says Poh.
As of Dec. 31, 2017, 84 per cent of Alam Sutera’s total debt was unsecured. And, the majority of Alam Sutera’s borrowings are at the holding company. Further, the notes are guaranteed by all major subsidiaries.
An upward ratings trend could emerge, if Alam Sutera shows progress in achieving core marketing sales of at least IDR4 trillion over a 12-month period and demonstrates the ability to maintain stable financial metrics, such that adjusted debt/ homebuilding EBITDA is below 3.5x and adjusted homebuilding EBIT/interest expense is above 3.0x.
Further, an upgrade will also require that the company maintains a strong liquidity position, supported by a long-dated debt maturity profile.
The ratings could be downgraded if Alam Sutera’s financial and liquidity profiles weaken, owing to: (1) the company’s failure to execute its business plans, in particular, its land sales to CFLD; (2) a deterioration in the property market, leading to protracted weakness in its operations and credit profile; and (3) a material depreciation in the Indonesian rupiah, which may increase the company’s debt servicing obligations.
Metrics indicative of downward ratings pressure include: (1) adjusted debt/homebuilding EBITDA exceeding 5.0x; (2) adjusted homebuilding EBIT/interest expense falling below 2.0x; or (3) insufficient cash to cover short-term debt obligations.
Established in November 1993 and listed on the Indonesian Stock Exchange in December 2007, Alam Sutera Realty Tbk is an integrated property developer in Indonesia that focuses on the sale of land lots in accordance with township planning requirements, as well as property development in residential and commercial segments in Indonesia.