(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 profitability.
-- 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 aggressively.
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 costs.
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 billion.
-- 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 billion.
-- 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%.