November 30, 2017 / 7:21 AM / a year ago

Fitch Affirms Lippo Karawaci at 'BB-'/'A+(idn)'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, November 30 (Fitch) Fitch Ratings has affirmed Indonesia-based property developer PT Lippo Karawaci TBK's Long-Term Issuer Default Rating (IDR) at 'BB-' and Fitch Ratings Indonesia has affirmed its National Long-Term Rating at 'A+(idn)'. The Outlook is Stable. A full list of rating action can be found at the end of this commentary. The affirmations reflect Lippo's improved performance, with presales rising to IDR5.4 trillion in 9M17 (or attributable presales of IDR3.0 trillion, accounting for only Lippo's share of sales made out of its 54% owned subsidiary, PT Lippo Cikarang Tbk (LPCK)) from a trough of IDR1.2 trillion in 2016 (IDR859 billion on an attributable basis). IDR4.9 trillion of the 9M17 presales stemmed from the sale of more than 13,000 units in the company's new "Meikarta" affordable-housing project. Fitch believes Lippo's 2018 and 2019 presale targets are optimistic and has therefore tempered the company's targets in its forecasts. We believe there is an element of execution risk with the company's shift in focus to the affordable-housing segment, and in particular, its Meikarta project. Around 50%-60% of the company's Meikarta sales in 9M17 stemmed from its own employees, with the balance helped by aggressive marketing. Lippo's ratings are supported by continued and healthy recurring cash flow from its hospitals, malls, hotels and property management businesses, which generate recurring EBITDAR of more than 1.2x of consolidated interest costs and operating lease rent. This mitigates financial risk during a slowdown in property sales. Lippo has strong capital market access, although its edge over rating peers has narrowed over time as peer access has improved. Lippo's ability to inject mature properties into the Singapore-listed real estate investment trusts (REITs) that it sponsors - a unique financing avenue available to the company over its rating peers - has also weakened in the last 18 months, as reflected in significant delays. For these reasons, and because there are increased risks around the success of Lippo's foray into affordable housing, we have tightened our negative rating sensitivity on leverage, as measured by net adjusted debt/adjusted inventory, to 45%, from 50%. 'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Project Execution Risk: The company's shift towards affordable housing, with a price tag of between IDR120 million-IDR400 million, rather than its previous focus on properties priced between IDR1 billion-IDR3 billion, marks a strategic shift in its business model. The Meikarta project is the company's largest endeavour in more than 50 years. Its first phase consists of 5.0 million square meters (sqm), including 1.5 million sqm of commercial area, 1 million sqm of open green space and 250,000 residential property units. The project is likely to account for a bulk of Lippo's cash flow in the medium-term. Risks are mitigated by the project's attractive location among several in-demand industrial zones and diverse infrastructure access. The affordable housing market also has real underlying demand. The development of new infrastructure facilities, including the Cawang-Bekasi-Timur-Cikarang light railway train, Jakarta-Bandung high-speed railway, Jakarta-Cikampek elevated toll road, Patimban deep seaport, Kertajati international airport and monorails should improve demand for the project over the medium term. Improving Recurring Cash Flow: We expect recurring cash flow to increase to IDR1.6 trillion by end-2018, after rising to IDR1.5 trillion in 2016 (2015: IDR1.3 trillion). Recurring cash flow includes the proportionately consolidated share of EBITDA from Lippo's hospital subsidiary - PT Siloam International Hospitals Tbk (SILO) - and dividend income from its ownership in First REIT and Lippo Malls Indonesia Retail Trust. Proportionately consolidated recurring EBITDAR cover of interest costs and operating lease rent weakened to 1.1x in 2016, from 1.3x in 2015, on account of higher interest costs, but we expect this to improve to around 1.3x by end-2017 due to a lower interest burden following Lippo's debt refinancing in 2016. Limited Rating Headroom: We expect leverage to remain at around 45% over the next two years, which is at our rating sensitivity for a downgrade. Cash collections may lag, despite the rebound in presales in 9M17, as Lippo may need to ramp up its systems and processes to accommodate the high sales volume stemming from its Meikarta project. The company demonstrated its reasonable flexibility in managing cash outflow and leverage during the 2015-2016 downturn in property demand, when its leverage remained at around 45%. This is mainly because Lippo owns significant land bank and additions are mostly discretionary. Low-Cost Land Bank: Lippo had undeveloped land of more than 6.0 million square meters (sq m) at end-June 2017, including 1.2 million sq m at LPCK, which houses the Meikarta project, but excluding land in projects that are under development. Much of this land bank was acquired at a low historical cost, supporting Lippo's strong EBITDA margin of more than 35%, after adding back capitalised interest expense, in the last few years. However, we expect Lippo's EBITDA margin to fall to around 20%-25% in the medium-term as most of its incremental presales will stem from the low-income Meikarta project. Increased Cash Flow Subordination: Lippo's stake in SILO was diluted to 51% at end-October 2017, from 62%, consequent to a IDR3.1 trillion rights issue where the public stake increased to 33%. Lippo expects to maintain control of the hospital-operator, but now has less access to the subsidiary's cash flows. Furthermore, Lippo's Meikarta project is owned by its 54% held listed subsidiary, LPCK. This means LPCK's contribution to consolidated cash flow will increase significantly in the next few years. Fitch proportionately consolidates the financials of these subsidiaries to assess Lippo's leverage and recurring EBITDAR fixed-charge cover to account for the cash flow subordination. DERIVATION SUMMARY Lippo's IDR is well positioned against peers, such as PT Bumi Serpong Damai Tbk (BSD, BB-/Stable) and PT Agung Podomoro Land Tbk (APLN, BB-/Stable). BSD has exhibited a better record of sales execution and higher annual property presales than Lippo, with lower leverage, but Lippo has stronger and more defensive recurring cash flow and still-better access to multiple financing options. This results in both companies having the same rating. APLN has similar property-development scale as Lippo, but weaker recurring cash flow. However, APLN's rating is supported by its lower leverage. Lippo's National Long-Term Rating compares well with PT Kawasan Industri Jababeka Tbk's 'A(idn)' rating. Lippo has larger property-development scale and stronger recurring cash flow and while Jababeka's property sales are more cyclical, as many comprise of industrial land sales, its rating is driven by adequate recurring cash flow coverage of interest costs. This stems from Jababeka's power sales to the state-owned electricity utility through a long-term agreement. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Annual attributable presales of around IDR4 trillion in 2018 and 2019 - Sales from the Meikarta project to post a gross profit margin of around 20% in the next three years - Annual growth of 5% in recurring revenue from malls, hotels, infrastructure and property management (2016: 14%) - Healthcare revenue to increase by 18% in 2017 and 15% in 2018, with EBITDA margins of 11%-12% (2016: revenue growth 25%; EBITDA margin 13%) - No asset injections to the REITs, given the significant uncertainty around the timing of these injections RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Negative Rating Action - Inability to achieve annual attributable presales of at least IDR4 trillion on a sustained basis - A weakening of the ratio of proportionately consolidated recurring EBITDAR, including dividend income from REITs, to the sum of interest cost and operating lease rent to less than 1.2x (2016: 1.1x; 2017F: 1.3x) for a sustained period - An increase in proportionately consolidated net adjusted debt/adjusted inventory to more than 45% (2016: 46%; 2017F: 42%) for a sustained period Developments that May, Individually or Collectively, Lead to Positive Rating Action - A rating upgrade is not expected in the medium term due to Lippo's smaller operating scale and recurring income base compared with higher-rated international peers. We also expect Lippo's leverage to remain high over the medium term as it executes its expansion plans. LIQUIDITY Comfortable Liquidity: Lippo has comfortable liquidity, as its earliest significant debt maturity is 2022, when its USD410 million 7% senior unsecured notes fall due. Lippo refinanced a significant portion of its debt in 2016, including the first-time issuance of a 10-year note of USD425 million at 6.75%. Lippo had around IDR1 trillion of near-term debt maturities as of end-June 2017, compared with readily available cash of IDR1.5 trillion. FULL LIST OF RATING ACTIONS PT Lippo Karawaci Tbk --Long-Term Foreign-Currency IDR affirmed at 'BB-'; Stable Outlook --Long-Term Local-Currency IDR affirmed at 'BB-'; Stable Outlook --Senior unsecured rating affirmed at 'BB-' --National Long-Term Rating affirmed at 'A+(idn)'; Stable Outlook Theta Capital Pte Ltd --USD425 million 6.75% senior unsecured notes due in 2026 affirmed at 'BB-' --USD410 million 7% senior unsecured notes due in 2022 affirmed at 'BB-' Contact: Primary Analyst (International Ratings) Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Primary Analyst (National Ratings) Robin Sutanto +6221 2988 6811 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Secondary Analyst (International Ratings) Bernard Kie Associate Director +65 6796 7216 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Summary of Financial Statement Adjustments - Land bank and advances paid on land purchases have been included in inventory and therefore working capital given the nature of the company's business. Long- and short-term customer advances on property purchases have also been treated as working capital. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. 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