Moody's Investors Service has affirmed the Ba2 corporate family rating of PT Pakuwon Jati Tbk - Photo by the Company.

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the Ba2 corporate family rating of PT Pakuwon Jati Tbk (IDX: PWON). At the same time, Moody’s has affirmed the Ba2 backed senior unsecured rating on the 2024 notes issued by Pakuwon Prima Pte. Ltd., a wholly-owned and guaranteed subsidiary of Pakuwon Jati. The outlook on the ratings is stable.

“The rating affirmation reflects Pakuwon Jati’s strong credit metrics and very good liquidity even in the current subdued operating environment, supported by a well-balanced income stream from its high-quality portfolio of development and investment properties,” says Jacintha Poh, a Moody’s Vice President and Senior Credit Officer on Wednesday (12/18).

The company’s investment properties comprise mostly retail malls that generate stable and recurring income, mitigating the volatile cash flow from its cyclical property development business, adds Poh, who is also Moody’s Lead Analyst for Pakuwon Jati.

Pakuwon Jati‘s marketing sales have slowed significantly in 2019 as the challenging macro-environment and election activities in the first half of the year have weakened demand for property. In the first nine months of 2019, the company achieved Rp1.0 trillion (US$71.42 million) of marketing sales, less than half the Rp2.2 trillion achieved in 2018.

While the weaker marketing sales will lead to a decline in Pakuwon Jati’s development revenue over the next 12-18 months, total revenue will be supported by continued growth in its leasing business. Moody’s expects Pakuwon Jati’s revenue to register around Rp7.3 trillion in 2020 (based on recognition of high rise building revenue by the percentage of completion), 53 percent of which will be from recurring sources.

More broadly, Moody’s also expects Pakuwon Jati’s resilient leasing business will continue to support its strong credit metrics. Specifically, over the next 12-18 months, Moody’s expects the company’s adjusted debt/homebuilding EBITDA to be around 1.2x and homebuilding EBIT/interest expense to be 9.5x. At the same time, Moody’s expects Pakuwon Jati’s recurring cash flows to cover around 5.5x of interest paid.

Pakuwon Jati’s rating is constrained by the company’s small scale relative to its regional and global peers, and it’s lack of geographic diversification. The company continues to maintain very good liquidity. As of 30 September 2019, the company had a cash position of Rp4.5 trillion, and Moody’s expects it to generate around Rp2.7 trillion of operating cash flow over the next 15 months.

Such an amount will be more than sufficient to repay its debt maturing over the next 15 months of around Rp1.1 trillion, a dividend payment of around Rp400 billion, and projected capital spending of around Rp2.3 trillion.

In terms of environmental, social and governance (ESG) factors, Moody’s has considered the governance risk stemming from Pakuwon Jati’s concentrated ownership by its promoter and three-member board of commissioners, of which one member is independent.

These governance concerns are partially balanced by the company’s diversified operations that provide for a well-balanced income stream; and track record of maintaining strong credit metrics, modest dividend payout and very good liquidity since 2012.

The stable rating outlook reflects Moody’s expectation that Pakuwon Jati’s credit metrics will continue to be supported by the recurring income from its investment properties, as well as its ongoing financial discipline while continuing to pursue growth. A rating upgrade is unlikely, given Pakuwon Jati’s small revenue base and geographic concentration.

Nevertheless, Moody’s would consider upgrading the rating if the company grows its revenue while maintaining a strong financial profile, with adjusted debt/homebuilding EBITDA below 1.5x and recurring EBITDA/interest expense above 4.0x, in conjunction with solid liquidity in the form of cash balances and committed facilities.

Pakuwon Jati’s ratings could face downward pressure if the company fails to implement its business plans; the company embarks on an aggressive development growth strategy; and/or the property market deteriorates, leading to protracted weakness in its operations and credit quality.

Moody’s would consider downgrading the company if adjusted debt/homebuilding EBITDA rises above 2.5x and recurring EBITDA/interest expense falls below 2.0x on a sustained basis. The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018.

Pakuwon Jati listed on the Indonesia Stock Exchange and controlled by the Tedja family is engaged in the development, management, and operation of retail malls, office buildings, hotels, condominium towers, and residential townships in Surabaya and Jakarta.

US$1=Rp14,000

Written by Lexy Nantu, Email: lexy@theinsiderstories.com