Moody's: Indonesian Property Developers Face a Higher Interest Burden
Property Assets owned by PT Agung Podomoroland Tbk in North Jakarta - Photo by Agung Podomoroland

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the B1 corporate family rating of PT Agung Podomoro Land Tbk (IDX: APLN). At the same time, Moody’s has affirmed the B1 backed senior unsecured rating of the 2024 notes issued by APL Realty Holdings Pte. Ltd., a wholly owned subsidiary of Agung Podomoro.

The notes are guaranteed by Agung Podomoro and some of its subsidiaries. Moody’s has also changed the outlook for the ratings above to negative from stable.

“The change in rating outlook to negative from stable reflects our expectation that Agung Podomoro’s credit metrics will remain weaker than the thresholds set for a B1 rating level if the company’s sale of industrial land is delayed and core marketing sales fail to pick-up in the second half of 2019,” says Jacintha Poh, a Moody’s Vice President and Senior Credit Officer.

In the first five months of 2019, Agung Podomoro achieved around Rp700 billion of core marketing sales, which was equivalent to 22 percent of its Rp3.2 trillion full-year target. The weak marketing sales was caused by poor buyer sentiment in the lead-up to Indonesia’s presidential election.

While the company was able to conclude the sale of Sofitel Bali and recognized a net gain of Rp366 billion in March 2019, its credit metrics were weak, with adjusted debt/homebuilding EBITDA at around 6.8x and homebuilding EBIT/interest expense at around 1.3x for the 12 months ended 31 March 2019.

“Agung Podomoro is planning to sell a second investment property in the second half of 2019 and use part of the proceeds to reduce debt. While we view a successful execution of such a plan as credit positive, it will not support a sustained improvement in the company’s credit metrics,” adds Poh, who is also Moody’s Lead Analyst for Agung Podomoro.

If the sale of the second investment property does not eventuate, Agung Podomoro’s credit metrics could still recover over the next 12-18 months if the company is able to achieve around Rp3 trillion of core marketing sales in 2019 and 2020; and conclude the Rp2.5 trillion of industrial land sale at its Podomoro Industrial Park in Karawang, Greater Jakarta to PT CFLD Karawang New Industry City Development.

In such a scenario, Moody’s expects the company’s adjusted debt/homebuilding EBITDA will be at 4.5x-5.0x and homebuilding EBIT/interest expense at 1.5x-2.0x.

The affirmation of Agung Podomoro’s B1 corporate family rating reflects the company’s established market position and portfolio of investment properties that provide for a healthy recurring income base.

For the 12 months ended 31 March 2019, Agung Podomoro’s recurring revenue accounted for 35 percent of total revenue, at around Rp1.6 trillion. Moody’s estimates the recurring cash flow covered around 0.8x of interest expense.

Over the next 12-18 months, assuming that the sale of the second an investment property does not occur, Moody’s expects the company’s recurring revenue to grow by around 10 percent, largely driven by the opening of a new retail mall in Medan and hotels in Bandung. Moody’s estimates the recurring cash flow coverage of interest expense will also remain around 0.8x.

In May 2019, Agung Podomoro obtained a new term loan facility which will address the maturity of its outstanding Rp1.3 trillion bonds over the next 12 months. However, Moody’s expects that the company’s liquidity will continue to remain weak, based on Moody’s expectation that cash and operating cash flow generation will not be sufficient to cover remaining debt maturities and capital spending.

Nonetheless, refinancing risk will be partially mitigated by the company’s undrawn committed facilities of around Rp1.2 trillion as of 31 March 2019, and track record of access to funding.

Agung Podomoro’s rating is constrained by the company’s (1) small scale when compared with global peers; (2) complex corporate structure; and (3) exposure to the volatile property sector and the evolving regulatory environment in Indonesia.

Given the negative rating outlook, an upgrade is unlikely over the next 12-18 months. Nonetheless, the outlook could return to stable if the company successfully executes it’s business plans such that (1) it’s credit metrics improve, specifically, if adjusted debt/homebuilding EBITDA is below 4.5x and adjusted homebuilding EBIT/interest expense is above 2.0x on a sustained basis; and (2) liquidity levels are good, in particular, if cash balances and committed facilities are sufficient to cover operating cash needs and debt repayments over a 12-18 month period.

Moody’s could downgrade the ratings if Agung Podomoro’s credit metrics and liquidity weaken, owing to: (1) a failure to achieve at least Rp3 trillion of annual core marketing sales and execute its industrial land sale in 2019; (2) a deterioration in the property market, leading to protracted weakness in the company’s operations; and (3) a material depreciation in the Indonesian rupiah, which could increase the company’s debt servicing obligations.

Metrics indicative of a rating downgrade include: (1) adjusted debt/homebuilding EBITDA exceeding 4.5x; (2) adjusted homebuilding EBIT/interest coverage falling below 2.0x; or (3) insufficient cash balances and committed facilities to cover operating cash needs and debt repayments over a 12-18 month period.

Agung Podomoro is an integrated property developer. It listed on the Indonesia Stock Exchange in 2010. The company and its subsidiaries are engaged in the development, management, and operation of apartments, houses, shopping centers, office towers, and hotel properties. It is controlled by Trihatma Kusuma Haliman, with an around 80 percent stake in the company on 31 March 2019.

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

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