Credit: Sentul City

JAKARTA (TheInsiderStories)Moody’s Investors Service has assigned a first-time B2 corporate family rating (CFR) to PT Sentul City Tbk (IDX: BKSL).

The outlook on the rating is stable.

RATINGS RATIONALE

“Sentul City’s B2 CFR reflects its ownership of a large and low-cost land bank at its Sentul City township, which is well positioned to benefit from infrastructure developments; thereby supporting the company’s marketing sales growth over the next 12-18 months,” said Moody’s Vice President and Senior Analyst Jacintha Poh in a press release on Monday (16/07).

“The B2 rating also takes into account Sentul City’s: (1) limited track record; (2) increased development and financing risks, which are partially mitigated by its joint-venture arrangements; (3) volatile financial performance owing to contributions from block transactions, which include land sales or sale of projects to joint ventures and (4) ability to roll over its short-term borrowings,” Poh who is also Moody’s Lead Analyst for Sentul City added.

Since its inception, Sentul City has focused on the development of its Sentul City township, which had a remaining land bank of around 2,000 hectares at 30 June 2018; a land area sufficient to support 15-20 years of development.

The company’s track record as a property developer is limited, owing to its low marketing sales levels (excluding block transactions) over the last three years — IDR770 billion in 2015, around IDR700 billion in 2016 and around IDR800 billion in 2017 — when compared with similarly-rated peers in Indonesia. Nonetheless, Sentul City township is well positioned to benefit from infrastructure developments, including the extension of Jakarta’s Light Rail Transit and the completion of the Bogor–Ciawi–Sukabumi toll road.

Moody’s believes these developments will improve the township’s connectivity and support increased demand for properties in the area. Consequently, Moody’s expects Sentul City’s core marketing sales to exceed IDR1 trillion over the next 12-18 months.

Sentul City’s target is to achieve total marketing sales of around IDR1.5 trillion in 2018, including Rp720 billion from residential sales, Rp280 billion from commercial sales and Rp450 billion from land sales. In the first half of 2018, the company achieved marketing sales of around Rp560 billion, including Rp180 billion from land sales.

Over the next 12-18 months, Moody’s expects Sentul City’s financial performance to remain highly dependent on block sales, which will contribute to 35%-40% of the company’s revenue. However, Moody’s expects that the company’s financial metrics will weaken in 2018, with adjusted debt/homebuilding EBITDA at around 4.4x and homebuilding EBIT/interest expense at around 2.4x, because Sentul City will increase borrowings to fund construction spending.

In 2016, Sentul City embarked on the development of Centerra Superblock within its township, which increased its development and financing risks. The company is constructing (1) a retail mall (AEON Mall); (2) the Verdura condominium which comprised of three towers; and (3) the Saffron Residence condominium which comprised of four towers. It also intends to commence construction of an office tower (Centerra Office Building) in 2018 and a hotel (AEON Condotel) in 2019.

Moody’s points out that Sentul City has partially mitigated some of the development and financing risks that it faces, by entering into joint ventures (JVs) with firstly, PT Pembangunan Perumahan Properti Tbk and secondly, Sumitomo Corporation (Baa1 stable) and Hankyu Realty Co. Ltd.

These JV arrangements reduced Sentul City’s capital spending requirements and allowed the company to tap the expertise and track record of its established partners.

Furthermore, Sentul City has entered into a master lease agreement for its retail mall with PT AEON Mall Indonesia for a period of 15 years, with an option to renew for another five years, thereby eliminating leasing risk when the mall completes in 2018.

Sentul City generates little recurring income — totalling around 10% of revenue in Q1 2018 — from: (1) estate management activities; and (2) its hospitality business, which includes hotels, restaurants and amusement parks. Moody’s expects Sentul City’s recurring revenue to grow significantly in 2019, owing to the contribution from AEON Mall. But, its ratio of recurring revenue to total revenue will remain less than 20% and Moody’s estimates that recurring cash flow will cover only around 0.6x of interest paid.

Sentul City‘s liquidity is expected to be weak over the next 12 months. As of 31 March 2018, the company had short-term borrowings of around IDR1.4 trillion against cash and cash equivalents of IDR238 billion. The short-term borrowings consisted largely of loans from non-banking corporates and individuals which Sentul City has a track record of
rolling over.

The rating outlook is stable, reflecting Moody’s expectation that Sentul City will continue to execute block transactions with strategic investors and roll over its short-term borrowings. Such a situation will support the company’s financial metrics within the threshold of its B2 rating level over the next 12-18 months.

Sentul City’s ratings will unlikely be upgraded over the next 12-18 months, given the company’s small-scale and reliance on cash flow from block transactions. However, in the longer term, an increase in core marketing sales to at least IDR4 trillion, positive free cash flow generation and the maintenance of solid liquidity in the form of cash balances and committed facilities will be positive for the ratings.

The credit metrics that will support a rating upgrade include adjusted debt/homebuilding EBITDA below 3.5x, and adjusted homebuilding EBIT/interest coverage above 3.0x on a sustained basis.

Sentul City’s ratings could be downgraded if its financial and liquidity profiles weaken, owing to: (1) the company’s failure to execute its business plans, such that its marketing sales fall below Moody’s expectations; (2) a deterioration in the property market, leading to a protracted weakness in its operations and credit profile; (3) a material depreciation in the Indonesian rupiah, which may increase the company’s debt-servicing obligations; and (4) the company’s inability to roll over its short-term borrowings and over time reduce reliance on short-term borrowings.

Credit metrics indicative of downward rating pressure include: (1) adjusted debt/homebuilding EBITDA exceeding 5.0x; (2) adjusted homebuilding EBIT/interest expense falling below 2.0x; or (3) insufficient cash and committed facilities to cover the company’s short-term debt obligations.

The principal methodology used in this rating was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1993, Sentul City Tbk (P.T.) is engaged in the development, management and operation of its Sentul City township project in Bogor Regency, Indonesia. The company was formerly known as PT Royal Sentul Highlands Tbk and listed on the Jakarta Stock Exchange in 1997.

At 30 June 2018, Sentul City was around 63% owned by Stella Isabella Djohan, either directly or through her fully controlled entity, PT Sakti Generasi Persada.

Email: fauzulmuna@theinsiderstories.com

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