(The following was released by the rating agency)
-- Indonesian real estate developer Alam Sutera Realty's
aggressive expansion, high project concentration, and execution
risks in new ventures temper our expectation for good
-- We are assigning a 'B' corporate credit rating and
'axBB-' ASEAN scale rating to Alam Sutera. We are also assigning
our 'B' issue rating to the proposed senior unsecured notes,
which the company's subsidiaries guarantee.
-- The stable outlook reflects our expectation that Alam
Sutera will maintain "adequate" liquidity while expanding
Rating Action On March 13, 2012, Standard & Poor's Ratings
Services assigned its 'B' long-term corporate credit rating and
'axBB-' ASEAN scale rating to Indonesia-based real estate
developer PT Alam Sutera Realty Tbk. The outlook is stable. At
the same time, we assigned a 'B' issue rating on the proposed
issue of senior unsecured notes by Alam Sutera International
Pte. Ltd., a special purpose vehicle set up to issue the notes.
Alam Sutera's subsidiaries guarantee the notes. The issue rating
is subject to our review of the final documents.
Rationale The rating on Alam Sutera reflects the company's
aggressive debt-funded expansion, high project concentration,
and execution risks for a proposed hospitality venture in Bali,
Indonesia. The company's large, low-cost, and well-located land
bank, strong growth potential, and good record of developing the
Alam Sutera township in Indonesia temper these weaknesses.
In our view, the single-project concentration risk is
material despite the company's diversification efforts. The Alam
Sutera township, which is west of Jakarta, will continue to
contribute the bulk of property sales in the next two years. The
company has launched its second project but contributions are
likely to remain limited. Alam Sutera benefits from the good
location and reputation of the project, as well as low land
We expect Alam Sutera to increase its debt aggressively over
the next two years, albeit from a low level, to fund land
acquisitions and new projects. In January 2012, the company
raised Indonesian rupiah (IDR) 786 billion in a sale of shares
for land bank acquisition. The proposed issue of up to US$150
million in senior unsecured notes for buying more land will
further increase debt to IDR2.8 trillion by the end of 2012 from
an estimated IDR554 billion at the end of 2011. The increased
debt includes a IDR900 billion in committed loan facilities to
acquire and develop the Bali hospitality project. Based on our
assumption of healthy growth in property sales and good margins,
we expect Alam Sutera's debt-to-capitalization ratio to increase
to about 41% in 2012 from 17% in 2011. This leverage is still
low for the current rating and provides the company room to
increase its debt.
In our base-case scenario, we expect Alam Sutera's property
sales to be about IDR2.4 trillion in 2012, slightly below IDR2.8
trillion achieved in 2011. In addition, we assume the company
will sell about 22 hectares of land every year, eventually
increasing up to 60 hectares after five years.
Alam Sutera's working capital requirements are minimal as
its short development cycle supports good cash flow generation.
We expect revenues to rise to IDR1.84 trillion in 2012, from
IDR1.38 trillion in 2011, with EBITDA margin of about 52%.
Assuming selling prices of land and developments increase
steadily, we expect profitability to remain in the 45%-55% range
depending on product mixes.
In our view, Alam Sutera's hospitality project in Bali
introduces new risks to its credit profile. The company has
limited experience in developing and operating property projects
in Bali. The investment is significant as the debt for this
project for 2012 constitutes about 14.9% of Alam Sutera's total
assets (as of Dec. 31, 2011). We do not expect this project to
contribute meaningful revenue in the next 12-18 months.
In our opinion, Alam Sutera's large low-cost land bank
should underpin its good profitability over the next three to
five years. The company's land bank can sustain its development
for at least the next 20 years with the land cost accounting for
10%-15% of average selling prices. We believe Alam Sutera can
buy land at lower costs than its peers because of its capital
resources and local market knowledge.
We assess Alam Sutera's liquidity as "adequate," as defined
in our criteria. We estimate that the company's liquidity
sources will exceed its uses by about 20% in 2012, based on the
following major assumptions:
-- The company's funds from operations will be about IDR620
-- We expect the company's capital expenditure in 2012 to be
IDR2.2 trillion, including IDR600 billion for the Bali
hospitality project and the balance for land acquisitions.
-- The company has debt maturities of IDR148 billion in 2012
and we project shareholders' distribution to be about IDR133
-- The company has cash of IDR1.0 trillion, committed
available facilities of IDR1.1 trillion and rights issue
proceeds of IDR786 billion.
We believe Alam Sutera has established relationships with
domestic banks, which will help the company fund its capital
expenditures if the proposed notes issue does not materialize.
The company also has the flexibility to stagger its capital
spending or land acquisition budget if funding is constrained.
The stable outlook reflects our expectation that Alam Sutera
will generate satisfactory cash flows from property sales at
good margins to partly mitigate the significant increase in
borrowings in 2012. The stable outlook also incorporates our
expectation that the proposed bond issue will be successful, and
the company will maintain adequate liquidity while expanding
aggressively. In our base-case scenario, we expect the company's
debt-to-EBITDA ratio to be about 2.9x and EBITDA interest
coverage 4.4x in 2012.
The potential upside to the rating is limited, in our view.
We may raise the rating if Alam Sutera executes its high-growth
strategy well, including replenishing its land bank at a low
cost and generating good profitability from the Bali hospitality
project. We may also upgrade the company if it increases its
operating scale and diversifies its cash flow sources to include
a larger number of projects and property leasing.
We may lower the rating if Alam Sutera deviates from its
strategy and core business of property development or makes
larger debt-funded acquisitions than we expected. The rating may
also come under pressure if a cyclical slowdown materially
reduces the company's property sales and lowers EBITDA margin to
less than 40%.