Bank Indonesia estimated the residential property prices getting slower until September of 2020 - Photo by Alam Sutera Realty

JAKARTA (TheInsiderStories)Moody’s Investors Service has affirmed the B2 corporate family rating of Alam Sutera Realty Tbk (P.T.). At the same time, Moody’s has affirmed the B2 backed senior unsecured rating of the 2020 notes, 2021 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 outlook remains negative.

Rating Rationale

“The rating affirmation reflects Alam Sutera’s healthy core marketing sales in 1Q 2019 and our expectation that the company’s refinancing risk over the next 12 months will be addressed by its proposed tap bond issuance,” says Jacintha Poh, a Moody’s Vice President and Senior Credit Officer.

“The outlook on Alam Sutera remains negative to reflect uncertainties over the company’s future land sales to China Fortune Land Development Co., Ltd (CFLD) because the latter is late on its payment of around Rp500 billion for the land that it purchased in 2018,” adds Poh, who is also Moody’s Lead Analyst for Alam Sutera.

For the first quarter of 2019, Alam Sutera achieved core marketing sales of around RP850 billion and Rp34 billion from the sale of land to CFLD. The company is on track to meet its full-year core marketing sales target of around Rp3.5 trillion but remained behind its land sale target of Rp1.5 trillion to CFLD.

Moody’s expects Alam Sutera’s financial metrics – adjusted debt/homebuilding EBITDA of around 4.5x and homebuilding EBIT/interest expense of around 2.5x – will remain within the B2-rating thresholds of below 5.0x and above 2.0x, respectively, if the company is able to achieve Rp2.5 trillion of core marketing sales and around Rp500 billion
of land sales to CFLD.

However, if Alam Sutera is unable to execute its land sales to CFLD, Moody’s expects adjusted debt/homebuilding EBITDA to weaken to around 5.0x in 2019 and 6.0x in 2020. Homebuilding EBIT/interest expense would then also weaken to less than 2.0x in 2020.

Alam Sutera’s refinancing risk over the next 12 months will be addressed upon a successful tap bond issuance. However, the company’s debt maturity profile remains short at around 2.5 years and it will face a maturity wall in 2022. The company intends to tap US$125 million of its 2022 notes and to use the net proceeds to redeem the outstanding $73 million of its 2020 notes, and for general corporate purposes.

Alam Sutera’s B2 ratings reflect the company’s ownership of a large and low-cost land bank, a situation which has allowed it to generate strong gross profit margins exceeding 50 percent. The ratings also take into account the increased volatility in Alam Sutera’s earnings and cash flow over the last two years, driven by larger contributions from one-off transactions instead of income from the company’s core business of property development.

The ratings are constrained by Alam Sutera’s small scale and limited geographic diversity. The company is also exposed to the cyclical the property sector, with limited contributions from the more stable, the recurring income stream from its investment properties.

Given the negative outlook, a rating upgrade is unlikely over the next 12-18 months. Nevertheless, the outlook could return to stable if the company: (1) successfully refinances the remaining $73 million of its 2020 notes; (2) continues to execute its business plans, in particular, it’s land sales to CFLD; and (3) maintains stable financial metrics, such that adjusted debt/homebuilding EBITDA is below 5.0x and adjusted homebuilding EBIT/interest expense is above 2.0x.

Moody’s could downgrade the ratings if Alam Sutera’s financial and liquidity profiles weaken owing to (1) an inability to address the refinancing of its 2020 notes; (2) a failure to execute its business plans, in particular, its land sales to CFLD; (3) a deterioration in the property market, leading to protracted weakness in the company’s operations; and (4) a material depreciation in the Indonesian rupiah, which could increase the company’s debt servicing obligations.

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 to cover short-term debt obligations. The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018.

Established in November 1993 and listed on the Indonesian Stock Exchange in December 2007, Alam Sutera Realty Tbk (P.T.) 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. At 31
December 2018, the family of The Ning King owned around 47 percent of the company.

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