by Jacintha Poh, Vice President – Senior Analyst, Corporate Finance Group
On 9 October, Indonesia’s Ministry of Maritime Affairs informed PT Agung Podomoro Land Tbk (IDX: APLN, Ba3 stable) that it could proceed with its reclamation of island G in North Jakarta, which the ministry suspended in 2016. Approval to restart work avoids costly write downs and compensation payments from the project’s termination. APLN’s business prospects will improve because its land bank in Jakarta will grow after completion of island G, which it expects in 2020.
APLN obtained government concessions to reclaim three islands — F, G and I — totaling around 550 hectares in North Jakarta, and had begun to reclaim the 161-hectare island G, also known as the Pluit City project. At 30 June, the island G reclamation assets’ carrying cost, including consultant fees, licenses and land-dredging activities, was approximately RP2.5 trillion ($185 million), or around 8% of APLN’s total assets.
Before administrative sanctions in May 2016 suspended all reclamation projects in North Jakarta, APL started selling residential units at Pluit City. Total contracted sales were Rp5 trillion ($370 million), of which Rp2 trillion of cash was collected from customers. Lifting the work suspension for island G removes the risk of significant losses from asset write-offs and the return of the cash collected from customers.
However, before reclamation can resume, APL has to evaluate and certify that the operation of coal-based power plants in Muara Karang, the mainland of North Jakarta, will not be affected. Therefore, the company expects reclamation work to restart in early 2019.
We believe APL will see sustained earnings growth from Pluit City, given the scarcity of land in Jakarta. The company will be able to resume cash collection of the remaining Rp3 trillion from previous contracted sales at Pluit City and also launch new residential units for sale, once the reclamation work restarts.
Over the next 12-24 months, we expect the company’s leverage, as measured by debt/homebuilding EBITDA, to weaken to around 3.3x-3.5x, from 2.8x in 2016 (see exhibit), reflecting lackluster contracted sales and increased debt to fund the Pluit City development. We estimate capex for Pluit City at around Rp700 billion in 2018. Previously, we excluded capex for the development from our leverage projection because of the work suspension.
The Pluit City project includes houses, shop-houses (where the first level is commercial and the second a residence) and high-rise buildings for residential and office use. In addition to social and public facilities such as schools and a water treatment facility, it will also include places of worship and recreational areas.
Although the suspension remains in place for islands F and I, the cost incurred for these two islands is small at around IDR500 billion. In addition, the company has not started any reclamation or planning work at either island.