June 8, 2017 / 11:22 AM / 4 months ago

Fitch Revises Pakuwon's Outlook to Positive; Affirms at 'BB-'

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, June 08 (Fitch) Fitch Ratings has revised PT Pakuwon Jati Tbk's (Pakuwon) Outlook to Positive from Stable. The Long-Term Foreign-Currency Issuer Default Rating (IDR), the foreign-currency senior unsecured rating and the rating on the USD250 million senior unsecured notes due in 2024 have been affirmed at 'BB-'. The notes are issued by Pakuwon Prima Pte Ltd and guaranteed by Pakuwon and some of its subsidiaries. The Outlook revision reflects Fitch's expectations that the scale and asset granularity of Indonesia-based Pakuwon's investment property (IP) portfolio will improve to levels commensurate with a higher rating over the next one to two years as the company continues to ramp up its portfolio. Fitch expects Pakuwon to continue to manage its development property business conservatively, and also views its development property risk as manageable, so long as the company maintains positive cash flow from operations (CFO). KEY RATING DRIVERS Solid Investment Property Portfolio: Pakuwon's ratings reflect its strong IP portfolio, which is driven mainly by its mall operations and generated around 75% of its total recurring revenue in 2016. Pakuwon's malls have around 94% occupancy rates, weighted by net leasable area, and have lease expiry profiles of around five years on average. Fitch expects Pakuwon's recurring EBITDA/net interest coverage ratio to remain above 2.5x, and recurring EBITDA to comfortably cover loan amortisation and dividend payment in 2017-2019. Pakuwon operates mainly superblocks that consist of a retail mall, office towers, a hotel and often high-quality residential developments. This significantly increases the value and appeal of each individual property within the superblock. However, given the interlinked-nature of the assets, Fitch measures Pakuwon's asset concentration on a superblock basis, rather than on an individual-asset basis. Nevertheless, the company's solid track record in developing high quality IPs, reflected in its sustained strong occupancy and robust recurring EBITDA growth, has led Fitch to relax the asset-concentration threshold required for a higher rating to 70% from 60%. Furthermore, Fitch also adjusts the measure for Pakuwon's interest coverage by using net interest, as we expect the company to maintain a healthy cash balance and therefore generate healthy interest income to partly offset its interest costs. Improving Property Demand: Fitch expects Pakuwon to book property presales of around IDR2.5 trillion in 2017, supported by improving macro-economic fundamentals and more positive sentiment domestically on the back of a reasonably successful tax amnesty program. Nevertheless, there may be short-term risks to demand, especially on higher-end properties, as the recent introduction of the financial transparency regulation, which gives the tax and financial authorities access to the banking information of Indonesian citizens, may lead consumers to defer spending on big-ticket items. Pakuwon's 1Q17 presales rose 10% yoy to IDR654 billion, about 28% of Fitch's 2017 forecast. Conservatively Managed Development Risk: Fitch views that Pakuwon's smaller development property scale relative to its peers is compensated by its ability to generate positive CFO on a sustained basis. Fitch believes this is because the company mostly funds its development property business through customer advances, and its strategy is to use recurring EBITDA to cover interest payments, loan amortisation and dividends. Pakuwon's focus on developing brownfield projects, whereby its current development pipeline is mostly situated in and around its existing projects, also helps the company to de-risk its development cash flows and reduce working capital needs. Conservative Financial Policy and Leverage: Pakuwon has maintained a conservative financial profile and has a track record of low leverage over the last four to five years. In 2013-2016, Pakuwon has managed to keep its leverage (adjusted net debt/adjusted inventory ratio) below the negative trigger of 35% and maintained its net debt/EBITDA ratio at around 1x. Fitch forecasts Pakuwon's leverage to remain around 24% in 2017 (2016: 26%) and to decline to 11% by 2019 in line with our expectation that property demand is likely to improve. Manageable US Dollar Exposure: Pakuwon uses call-spread options to hedge the foreign currency risk on its US dollar notes, covering Indonesian rupiah depreciation between 13,500-16,500 per US dollar across the full notional principal of its bonds. Even without the benefits of the hedge, Fitch estimates that if the rupiah depreciates further to 15,000 per dollar, Pakuwon's recurring EBITDA net interest cover will still remain above 2x. DERIVATION SUMMARY Pakuwon's rating compares strongly against other 'BB-' property developers, such as PT Bumi Serpong Damai Tbk (BSD; BB-/Stable), PT Agung Podomoro Land Tbk (APLN; BB-/Stable) and Lai Fung Holdings Limited (LF; BB-/Stable). Relative to BSD, Fitch believes that Pakuwon's smaller development property portfolio and higher IP asset concentration is counterbalanced by its strong CFO generation, larger investment property scale, higher recurring EBITDA net interest cover, and the stronger quality of its IP assets. We expect Pakuwon's IP concentration to drop materially by 2019 and its leverage to remain lower than BSD's. Pakuwon and APLN have similar development property scales. Although Pakuwon's development properties are more geographically concentrated than APLN's, the risks are mitigated by Pakuwon's strong CFO generation. Pakuwon also has a larger investment property scale, stronger recurring EBITDA net interest cover, and better asset quality than APLN. Compared to LF, Pakuwon's recurring EBITDA and property development scale are considerably larger, with recurring EBITDA net interest cover ratio well above LF's. Pakuwon's larger and growing recurring EBITDA scale, improving asset granularity, strong CFO generation, and low leverage justifies the Positive Outlook on its rating, even after accounting for the higher country-risk inherent in Indonesia compared to China. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Presales of around IDR2.5 trillion in 2017 and around IDR3 trillion in 2018. - Recurring EBITDA margin of above 50% in 2017 and 2018. - Construction capex of around IDR1.7 trillion-1.8 trillion in 2017 and 2018 - Land acquisition capex of IDR250 billion in 2017 and IDR200 billion in 2018 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to an Upgrade - Sustained generation of positive CFO - Growth in Pakuwon's investment property portfolio such that its recurring EBITDA improves to above USD120 million (2017F: USD107 million) - Recurring EBITDA/net interest expense sustained above 3x (2017F: 2.5x) - Improving asset granularity, as indicated by its three largest superblock assets generating less than 70% of recurring revenue (2017F: 77%) The Outlook may be revised back to Stable if the company fails to meet the positive rating triggers. LIQUIDITY As of December 2016, Pakuwon had cash balances of IDR2.4 trillion and committed unused facilities of around IDR1.5 trillion, which are adequate to cover short-term debt maturities of IDR770 billion, construction capex of IDR1.7 trillion and discretionary land acquisition capex of IDR250 billion in 2017. In early 2017, Pakuwon also issued a USD250 million bond, which was used to refinance its USD200 million bond. This issuance has extended the maturity profile of the company's debt, and allows for more flexibility in managing cash flows. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Bernard Kie Associate Director +62 21 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Summary of Financial Statement Adjustments - Fitch has adjusted Pakuwon's consolidated recurring EBITDA by the net income attributable to minorities due to Pakuwon's less than 100% ownership in some of its subsidiaries. Fitch has also deducted minority interests from the calculation of leverage to reflect the minorities' stake. 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