October 11, 2016 / 7:46 AM / a year ago

Fitch Affirms Alam Sutera at 'B+'; Outlook Negative

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, October 11 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Indonesia-based property developer PT Alam Sutera Realty Tbk (ASRI) at 'B+'. The Outlook is Negative. Fitch has also affirmed ASRI's senior unsecured debt rating at 'B+' and assigned a Recovery Rating of 'RR4'. A full list of rating actions is at the end of this commentary. The affirmation of ASRI's ratings reflects our view that the company's weak contracted sales over the 18 months to end-August 2016 is mostly cyclical and its business risk profile is largely intact, supported by a large low-cost land bank, quality assets and established domestic franchise. The Negative Outlook on ASRI's Long-Term IDR reflects the potential challenges it may face in improving contracted sales. The high proportion of commercial property sales and bulk land-sales to institutional buyers in its pipeline has increased ASRI's business risk profile, but may be counterbalanced by a more conservative capital structure. Fitch may downgrade ASRI's ratings if the company cannot improve contracted sales to at least IDR3.5trn by end-2017 or if the ratio of contracted sales/gross debt remains lower than 0.6x. KEY RATING DRIVERS Weaker Sales Largely Cyclical: ASRI's recorded IDR1.2trn of contracted sales in the first eight months to end-August 2016 was just 23% of its full-year target of IDR5trn; a similar performance to 2015. This was mostly due to a higher proportion of commercial-property in the company's sales mix at a time of slower domestic economic activity and weak property demand. The company's inability to sell its office tower, The Tower, in Jakarta's central business district amid an office space glut is a key reason behind continued weak contracted sales. However, we expect better sales from this project in 2017 with improved domestic economic sentiment. Long-Term Credit-Profile Intact: ASRI's business risk is fundamentally unchanged, with a large low-cost land bank and established domestic franchise. The company had a land bank of over 19 million square meters (sqm) available for development, with a carrying value of over IDR8.6trn, at end-June 2016. Overall, we expect ASRI's contracted sales to improve to at least IDR3.5trn in 2017, supported by better domestic demand. Cash flows will also be driven by its agreement with China Fortune Land Development Co. Ltd (CFLD) to sell its land bank in the Pasar Kemis district in Tangerang, a region situated 30km west of Jakarta. ASRI received a deposit of IDR1.45trn in July 2016 as part of this agreement and is expected to sell around 1 million sqm of land to CFLD annually for the next five years. Improving Macroeconomic Sentiment: Domestic consumer sentiment has been improving since 2Q16, fuelled by lower commodity price volatility and a more stable exchange rate. The government's infrastructure expansion programme also had better traction compared with 2015 and its tax amnesty programme, announced in June 2016, has performed better than the government expected. The real estate industry directly benefits from any wealth repatriated as part of the programme, which has to be invested in either real estate or government securities. We expect increased domestic declarations of wealth to help more consumers purchase property, which had been put on hold following the government's increased scrutiny around tax evasion since 2015. Indicators of real economic activity, such as domestic traffic volumes and automobile sales, are also rising; see <a href="https://www.fitchratings.com/site/pr/1010932"> Fitch: Indonesia Economic Rebound to Spur Industrial-Land Demand, dated 29 August 2016. Execution Risks Remain: Fitch believes ASRI may find it challenging to sell 1 million sqm of land annually to CFLD. The cooperation agreement delineates 5 million sqm of land in Pasar Kemis. Fitch expects it to be difficult and costly to acquire the requisite land beyond the first two years. CFLD also has the right to set-off part of the land value purchased from ASRI against the advance payment, and ASRI will have to return the balance to CFLD if the agreement is terminated. Large Low-Cost Land Bank: The average cost of the company's land bank was IDR0.5m per sqm at end-June 2016. ASRI sold its residential land plots at an average price of IDR5m per sqm in 2015, and its commercial plots in its mature township of Alam Sutera fetched an average price of IDR23m. The company reduced incremental land purchases in 2015 to IDR409bn, from IDR1.3trn in 2014, to conserve cash amid weaker property sales. It expects to purchase between IDR1trn-1.3trn annually in 2017 and 2018. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for ASRI include: - IDR1.4trn of contracted sales for 2016 and IDR3.5trn for 2017 - cash collections from contracted sales to be made over two to three years on average, in line with cash collections - contracted sales/gross debt ratio to improve to around 0.6x in 2017 (LTM to June 2016: 0.4x; 2015: 0.3x) - Net debt/adjusted inventory to remain less than 50% over the next three years (end-June 2016: 49%). RATING SENSITIVITIES Negative: Future developments that may individually or collectively lead to a downgrade include: - inability to improve annual contracted sales to at least IDR3.5trn by end-2017 - inability to improve contracted sales/gross debt to more than 0.6x by end-2017 - net debt/adjusted inventory sustained more than 50% - higher spending on non-core businesses. Positive: Not meeting the negative rating sensitivities for an extended period may result in the Outlook being revised to Stable. LIQUIDITY ASRI's earliest significant debt maturity is in 2019, when the USD225m (around IDR3trn) five-year 9% senior unsecured bond falls due. ASRI has drawn a further IDR1.5trn of construction finance from banks as at end-June 2016, which it has used to complete its high-rise projects amid weak cash flows. Repayments of these loans are manageable, as they are spread across the next four to five years. FULL LIST OF RATING ACTIONS PT Alam Sutera Realty Tbk - Long-Term IDR: affirmed at 'B+'; Negative Outlook - Senior unsecured rating: affirmed at 'B+'; assigned Recovery Rating of 'RR4' Alam Synergy Pte Ltd - Long-term rating on USD225m senior unsecured bond due in 2019: affirmed at 'B+/RR4' - Long-term rating on USD235m senior unsecured bond due in 2020: affirmed at 'B+/RR4' Contacts: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard 35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Bernard Kie Analyst +62 21 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Summary of Financial Statement Adjustments - ASRI reports additions to land for development and advances made towards land purchases as cash flow from investments. Fitch has deducted these items from cash flow from investments and added these to working capital (as cash paid to suppliers), as Fitch treats these payments as working capital outflows. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012922 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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