(Agency corrects the company name to Lippo Malls Indonesia Retail Trust from Lippo Mapletree Retail Trust which was wrongly stated in the previous version published on 12 September 2012.) (The following statement was released by the rating agency)
Sept 12 -
Summary analysis -- PT Lippo Karawaci Tbk. ------------------------ 12-Sep-2012
CREDIT RATING: BB-/Stable/-- Country: Indonesia
Primary SIC: Real estate
Credit Rating History:
Local currency Foreign currency
28-Feb-2012 BB-/-- BB-/--
23-Nov-2010 B+/-- B+/--
26-May-2009 B/-- B/--
The rating on Indonesia-based property developer PT Lippo Karawaci Tbk. (Lippo Karawaci) reflects the company’s aggressive capital expenditure plans and exposure to volatile cash flows from the cyclical property development business. The company’s dominant position in the domestic property market and its strong financial flexibility in terms of good access to equity and capital markets temper the above weaknesses. The rating also reflects our assessment that Lippo Karawaci has a “fair” business risk profile and an “aggressive” financial risk profile, as our criteria define the terms.
We view Lippo Karawaci’s aggressive expansion appetite as a rating weakness. Higher capital expenditure could result in more borrowings than what we assumed in our base-case scenario. The company’s good financial flexibility tempers this weakness. Lippo Karawaci has the flexibility to sell assets to fund expansion.
We expect Lippo Karawaci’s strong operating performance to continue in the next 12 to 24 months. Demand for the company’s properties and healthcare services has been robust and occupancy at its hotels and shopping malls has increased due to strong economic growth in Indonesia. Although borrowings have increased by US$150 million as of June 30, 2012, from about US$650 million a year earlier, the company’s profitability has also improved in the first half of 2012 compared with a year earlier. Both factors have contributed to a ratio of lease-adjusted debt to EBITDA of about 4.2x, which is consistent with the rating. This ratio has improved from an average of 4.7x in 2009-2011.
Lippo Karawaci’s healthcare services generate more stable cash flows than property development, albeit at lower margins. We expect the prospects for healthcare to be positive due to the shortage of good-quality healthcare services and the rising affluence in Indonesia.
Lippo Karawaci’s recurring income from leasing properties, property management, and dividends from its investment in First REIT and Lippo Malls Indonesia Retail Trust (not rated) also provide stability to its cash flows. We expect dividends from REITs to contribute about 12% of the company’s consolidated EBITDA in the next one to two years.
We believe the good market position, long record, and satisfactory profitability of Lippo Karawaci’s property development and healthcare businesses underpins the rating. EBITDA margins on property development are 25%-27%, while those for the non-property development businesses are 20%-23%. In our base-case scenario, we expect Lippo Karawaci’s consolidated revenue to increase to about Indonesian rupiah (IDR) 5.0 trillion-IDR5.5 trillion in 2012 from about IDR4.1 trillion in 2011. We anticipate EBITDA to go up to IDR1.2 trillion from IDR1 trillion. With the completion of more hospitals in the next one to two years, we expect EBITDA from the healthcare segment to grow by about 30% to IDR140 billion in 2012 compared with 2010. We expect the ratio of lease-adjusted debt to EBITDA to improve to less than 4.2x and the ratio of debt to capitalization to remain less than 45% by the end of 2012. For the 12 months ended June 30, 2012, the lease-adjusted debt-to-EBITDA ratio was 4.2x and the debt-to-capitalization ratio was 37.8%.
Lippo Karawaci’s liquidity is “adequate,” as defined under our criteria. The company has a long maturity profile with the bulk of its borrowings comprising senior unsecured notes due in 2015. Near-term refinancing needs are limited. In addition, in May 2012, the company raised US$150 million in notes due 2019.
Capital expenditure is the main use of liquidity and the company has some flexibility to adjust this spending. In our base-case scenario, we expect the company’s sources of liquidity to exceed its uses by at least 1.2x over the next 12 months. Our liquidity assumptions are based on the following factors and assumptions:
-- Funds from operations will be IDR700 billion-IDR800 billion in 2012.
-- Cash and cash equivalent are IDR6.1 trillion as of June 30, 2012.
-- Committed capital expenditure and working capital needs for the next 12 months are about IDR2 trillion.
Lippo Karawaci has good headroom in its financial covenants. As of June 30, 2012, the company complied with the covenants in its bank loan agreements of a minimum interest cover of 1x and debt-to-equity ratio of less than 2.7x. We expect Lippo Karawaci to maintain a comfortable cushion in the covenants in the next 12 to 18 months using our base-case assumptions. In the unlikely event that EBITDA declines by 20%, we expect the company will continue to comply with the covenants.
The stable outlook reflects our expectation that Lippo Karawaci’s strong growth from its property development and healthcare businesses, stable profitability, and good financial flexibility will translate to a financial performance over the next 12 months that is appropriate for a ‘BB-’ rating.
We could lower the rating if Lippo Karawaci’s expansion is more aggressive than we expected and is debt funded. We could also downgrade the company if its revenues and profitability deteriorate. This could occur if a significant slowdown in Indonesia’s economy or a sharp increase in interest rates reduces the demand for properties and healthcare services. We consider a lease-adjusted debt-to-EBITDA ratio of more than 4.5x to be a downgrade trigger.
Potential upside to the rating is limited. However, we could upgrade Lippo Karawaci if: (1) the company expands its business scale and diversity; and (2) it improves the income contributions from stable and less cyclical businesses such as healthcare, property leasing, and property management.