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 downgraded the corporate family rating of Agung Podomoro Land Tbk (P.T.) to B1 from Ba3. The outlook on the ratings is stable.

The agency has also downgraded the backed senior unsecured rating of the bonds issued by APL Realty Holdings Pte. Ltd., a wholly owned subsidiary of Agung Podomoro, to B1 from Ba3. The bonds are guaranteed by the company and some of its subsidiaries.

RATINGS RATIONALE

“The downgrade reflects our expectation that Agung Podomoro’s credit metrics will weaken to levels no longer consistent with a Ba3 rating because of its low levels of marketing sales. Further, a greater proportion of its cash flows over the next 12-18 months will come from one-off block sales, a characteristic that is more in line with single B-rated property developers,” says Jacintha Poh, a Moody’s Vice President and Senior Credit Officer in a written statement.

He added, “Nonetheless, we expect Agung Podomoro will continue to generate predictable recurring cash flow sufficient to cover 0.9x-1.0x of adjusted interest expenses in 2018 and 2019.”

For the first 10 months of 2018, Agung Podomoro achieved around Rp2.3 trillion (US$156.46 million) of core marketing sales despite efforts to spur demand through special promotions and discounts.

While the 10-month marketing sales achievement was higher than the Rp1.9 trillion achieved for the full year of 2017, it was well below Moody’s expectation of Rp3.5 trillion and points to weak demand from buyers.

Accordingly, Moody’s regards a strong pick-up in sales over the last two months of 2018 as unlikely. Further, Moody’s expects that rising interest rates and political risks ahead of upcoming presidential elections in Indonesia could dampen sentiment among homebuyers and constrain marketing sales in 2019.

Consequently, Moody’s expects Agung Podomoro’s key credit metrics to weaken over the next 12-18 months. Leverage — as measured by adjusted debt/homebuilding EBITDA — will likely increase to 4.0x-4.3x in 2018 and 2019 from 3.7x for the 12 months ended 30 September 2018.

And interest coverage — as measured by homebuilding EBIT/interest expense — will likely fall to around 2.0x from 3.2x over the same period. The lackluster marketing sales achievement will also result in Agung Podomoro relying more on cash flows from one-off block sales.

Moody’s expects the company to (1) conclude and receive cash from the sale of its Sofitel Bali Hotel for around IDR1.6 trillion by the end of 2018; and (2) conclude another industrial land sale at its Podomoro Industrial Park in Karawang, Greater Jakarta to PT CFLD Karawang New Industry City Development for around Rp2.5 trillion in 2019, but cash will be collected over a three-year period from 2019 to 2021.

Agung Podomoro‘s liquidity will remain weak over the next 12 months, owing to its large short-term debt maturities of around IDR1.7 trillion. Nonetheless, Moody’s expects refinancing risk will be mitigated by the company’s undrawn committed facilities of around IDR2.0 trillion as of 30 September 2018 and track record of access to funding.

The developer’s B1 rating continues to reflect its established position as one of the largest property developers in Indonesia, with  diversification across multiple projects and property segments — residential, office, retail, industrial and hospitality.

On the other hand, the 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.

The stable outlook reflects Moody’s expectation that Agung Podomoro will (1) generate a stable recurring revenue from its investment propertiesand achieve annual marketing sales of above IDR2.5 trillion; (2) maintain financial discipline while pursuing growth; and (3) successfully refinance its debt maturities over the next 12-18 months.

A near-term upgrade is unlikely, given the weak operating performance. Upward ratings trend could emerge if Agung Podomoro: (1) achieves core marketing sales of around IDR3.5 trillion on a sustained basis; (2) improves its financial profile, such that adjusted debt/homebuilding EBITDA falls below 3.5x and adjusted homebuilding EBIT/interest coverage is above 3.0x; and (3) maintains healthy liquidity in the form of cash balances and committed facilities.

Agung Podomoro’s rating could face further downward pressure if: (1) the company fails to implement its business plans and execute planned assets sales; (2) the property market deteriorates, leading to protracted weakness in the company’s operations and credit metrics; or (3) the company does not have sufficient cash and committed facilities to cover its short-term debt obligations.

Metrics indicative of a downgrade include adjusted debt/homebuilding EBITDA over 4.5x and adjusted homebuilding EBIT/ interest coverage below 2.0x on a sustained basis.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018.

Agung Podomoro Land Tbk (P.T.) is an integrated property developer and listed on the Indonesia Stock Exchange in 2010. The company and its subsidiaries are engaged in the development, management and operation of apartments, landed houses, shopping centers, office towers and hotel properties.

It is controlled by Trihatma Kusuma Haliman, who had an
around 80 percent stake in the company at 31 October 2018.

US$1: RP14,700

Written by Staff Editor, Email: theinsiderstories@gmail.com