JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the B2 corporate family rating of Modernland Realty Tbk (P.T.). The outlook on ratings is maintained at stable.
Moody’s has also affirmed the B2 backed senior unsecured rating of the 2019 notes issued by Marquee Land Pte. Ltd. and the 2024 notes issued by Modernland Overseas Pte. Ltd. Both parties are wholly owned subsidiaries of Modernland. The notes are guaranteed by Modernland and most of its subsidiaries.
“The affirmation of Modernland’s B2 rating reflects (1) the company’s ability to execute one-off land sales to its joint ventures, which supported its marketing sales in 1H 2018; and (2) our expectation that its core marketing sales will improve to around IDR2.0 trillion in 2018,” says Jacintha Poh, a Moody’s Vice President and Senior Analyst.
“While the one-off land sales have created volatility in Modernland’s revenue and cash flows, its joint ventures with reputable partners mitigate development and funding risk while supporting the company’s growth,” adds Poh, who is also Moody’s Lead Analyst for Modernland.
Modernland’s target is to achieve marketing sales of IDR3.5 trillion in 2018, with around IDR1.7 trillion derived from residential sales, around IDR1.0 trillion from industrial land sales and IDR800 billion from one-off land sales.
In 1H 2018, the company achieved marketing sales of around IDR2.0 trillion, with around IDR700 billion from residential sales, around IDR110 billion from industrial land sales and IDR1.2 trillion from the sales of land at Bekasi to its joint venture with PT Waskita Karya Realty, a subsidiary of Waskita Karya Tbk (P.T.).
Moody’s expects Modernland’s key credit metrics will weaken in 2018 because of (1) a decline in revenue owing to lower contributions from
one-off land sales; and (2) an increase in debt owing to higher capital
spending to replenish its land bank.
Leverage–as measured by adjusted debt/homebuilding EBITDA–will weaken to 4.8x in 2018 from 3.7x for the 12 months ended 30 June 2018. Interest coverage–as measured by homebuilding EBIT/interest expense– will also weaken to 2.1x from 2.4x over the same period. Nonetheless, these metrics remain within Modernland’s B2 rating parameters.
Modernland’s rating is constrained by its small scale and lack of geographic diversity outside Greater Jakarta. The company is also exposed to the cyclical property sector, with limited contributions from the more stable and recurring income stream of its investment properties.
Modernland’s liquidity is weak over the next 12 months, owing to large short-term debt maturities of around IDR680 billion and large capital spending of around IDR1 trillion. As of 30 June 2018, the company had cash and cash equivalents of IDR560 billion, and Moody’s expects it to generate around IDR1.0 trillion in cash from operations over the next 12 months.
Nonetheless, the amount of capital spending is uncommitted and Modernland
is able to adjust its spending according to availability of cash flows and funding.
“Modernland’s bonds are rated in line with its B2 corporate family rating because bond holders are not exposed to either legal or structural subordination risk,” says Poh.
At 30 June 2018, 82% of Modernland’s total debt was unsecured. While the
majority of Modernland’s borrowings are at the holding company level, the
notes are guaranteed by all major subsidiaries.
The stable outlook reflects our expectation that Modernland will (1) achieve its sales target; (2) maintain financial discipline while pursuing growth; and (3) successfully refinance its debt maturities over the next 12-18 months.
The ratings could be upgraded if Modernland successfully executes its expansion strategy — supported by sustained improvements in its sales
performance and positive free cash flow generation — and maintains solid
liquidity in the form of cash balances and committed facilities. Credit metrics that will support a ratings upgrade include adjusted debt/homebuilding EBITDA below 3.5x, and adjusted homebuilding EBIT/interest coverage above 3.0x on a sustained basis.
However, the ratings could be downgraded if: (1) Modernland fails to implement its business plans; (2) the property market deteriorates, leading to protracted weakness in Modernland’s operations and credit profile; or (3) Modernland makes large capital spending including land acquisition that weakens its liquidity profile.
Moody’s would consider downgrading the rating if: (1) adjusted debt/homebuilding EBITDA rises over 5.0x; (2) adjusted homebuilding
EBIT/interest coverage falls below 2.0x; and (3) cash holdings and committed facilities are insufficient to cover the company’s short term
Modernland Realty Tbk (P.T.) is an integrated property developer in
Indonesia that focuses on industrial town development, residential development and township development. It also has small exposures to the
hospitality and commercial property segments.
The company listed on the Jakarta Stock Exchange in 1993, and is controlled by the Honoris family through direct ownership and various holding companies, including a 9.6% stake held by AA Land Pte. Ltd.