(The following statement was released by the rating agency)
Oct 05 - =============================================================================== Summary analysis -- PT Alam Sutera Realty Tbk. -------------------- 05-Oct-2012 =============================================================================== CREDIT RATING: B/Stable/-- Country: Indonesia =============================================================================== Credit Rating History: Local currency Foreign currency 12-Mar-2012 B/-- B/-- =============================================================================== Rationale
The corporate credit rating on Indonesia-based property developer PT Alam Sutera Tbk. reflects the company's aggressive debt-funded expansion, small scale, high project concentration, and execution risks for its investments in a proposed hospitality venture in Bali, Indonesia. The company's large, low-cost, and well-located land bank, its track record of developing the Alam Sutera township in Indonesia, and good growth potential for the country's property market temper these weaknesses. The rating also reflects our assessment that Alam Sutera has a "vulnerable" business risk profile and an "aggressive" financial risk profile, as our criteria define the terms.
In our view, Alam Sutera's 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, Pasar Kemis, located west of Jakarta, but near-term contributions are likely to remain limited.
We expect Alam Sutera to increase its debt aggressively over the next two years, albeit from a low level. In first-half 2012, the company raised Indonesian rupiah (IDR) 786 billion in a sale of shares as well as US$150 million in a senior unsecured debt issue for the acquisition of property assets and land. This capital raising will increase debt substantially to IDR2.8 trillion by the end of 2012 from an estimated IDR554 billion at the end of 2011. The increased debt includes IDR900 billion in committed loan facilities that will be used to acquire and develop a proposed Bali hospitality project. Based on our assumption of healthy growth in property sales and healthy margins, we expect Alam Sutera's debt-to-capitalization ratio will remain in check and will increase to about 41% in 2012 from 17% in 2011. This leverage is low for our expectations at the current rating and provides latitude for the company to increase debt.
In our base-case scenario, we forecast Alam Sutera's property sales at about IDR2.8 trillion in 2012, the same amount it 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 timely cash flow generation. We expect revenues to rise to IDR1.84 trillion in 2012, from IDR1.38 trillion in 2011, achieving an 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 the share of high-margin products such as shophouses in total sales.
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 10.0% of Alam Sutera's total assets (as of June 30, 2012). We do not expect this project to contribute meaningful revenue in the next 12-18 months.
In our opinion, Alam Sutera's large and low-cost land bank should underpin its profitability over the next three to five years. The company's land bank can sustain its planned development for up to the next 15-20 years as the land cost accounts for 10%-15% of average selling prices. We believe Alam Sutera can continue to replenish its land bank at a lower cost than its peers because of its sizeable 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 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 IDR2.3 trillion as of the end of June 2012.
We believe Alam Sutera has established relationships with domestic banks. As of June 30, 2012, the company complied with the covenants in its bank loan agreements. We expect Alam Sutera 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 20%, we believe the company will continue to comply with the covenants. 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 healthy margins to partly mitigate the significant increase in borrowings in 2012. The outlook also incorporates our expectation that the company will maintain adequate liquidity while expanding aggressively. In our base-case scenario, we forecast the company's debt-to-EBITDA ratio to be about 2.9x and EBITDA interest coverage at 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 project. We may also upgrade the company if, through the successful delivery of its projects, 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%.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key credit factors: Global Criteria for Single-Family Homebuilders, Sept 27, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 ((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.firstname.lastname@example.org, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.email@example.com))