March 15, 2017 / 7:31 AM / 8 months ago

Fitch Affirms Bumi Serpong Damai at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, March 15 (Fitch) Fitch Ratings has affirmed Indonesia-based homebuilder PT Bumi Serpong Damai Tbk's (BSD) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. The agency has also affirmed the company's 'BB-' senior unsecured rating and the 'BB-' rating on its outstanding US dollar bonds. The US dollar bonds are issued by BSD's subsidiary, Global Prime Capital Pte. Ltd, and guaranteed by BSD. A full list of rating actions can be found at the end of this commentary. The rating affirmation reflects BSD's robust property sales in 2016, which outperformed that of most of its peers and came despite the weak domestic demand for property during this period. BSD's performance is supported by its access to the largest land bank among domestic developers of more than 48 million square metres, which gives the company significant product and price-point diversity to tailor its offerings to suit demand patterns. BSD's ratings also reflect solid recurring cash flows from its portfolio of 17 operational investment properties and two hotels. They generated EBTIDA of more than IDR1 trillion in 2016 (around USD80 million), and provided robust coverage of net interest expense of 1.8x at end-2016. KEY RATING DRIVERS Property Sales Outperformed Peers': BSD sold IDR6.2 trillion of property in 2016, including IDR560 billion of land to a joint venture project with Mitsubishi Corporation of Japan. Its sales were better than those of its peers and met 91% of the company's target for the year, despite the sharp deterioration in property demand during the period. BSD was able to sell ample residential inventory in the IDR1 billion-1.5 billion price range last year to meet the still-robust demand from first-time home buyers. Demand from buyers of second and third properties for investment purposes and that for larger properties was weak amid the government's clampdown on income tax evasion last year. Property Demand to Improve: We expect BSD to sell more than IDR6 trillion of property in 2017, supported by improving economic fundamentals, and more positive sentiment domestically as domestic income tax declarations increase, following the government's tax amnesty programme that will close in March this year. We expect higher demand for property to also be driven by aggressive marketing of mortgage loans by domestic banks, in the wake of the relaxation of interest rates by Bank Indonesia in 2016. Consequently, interest rates on housing loans have fallen to multi-year lows and the proportion of BSD's property sales funded by bank loans has increased to 65% in 2016, from around 45% in 2015. High Investment Property Capex: BSD expects to spend around IDR2 trillion annually over the next three years to expand its portfolio of investment properties and hotels. The recurring cash flows generated by these properties provide BSD's creditors with a higher degree of protection during cyclical downturns, than property sales. Over 88% of BSD's recurring revenue in 2016 stemmed from its investment properties, and the balance from its hotels. While investment-property EBITDA growth has lagged Fitch's expectations due to slower ramp-up of some of BSD's newer assets, overall occupancy was strong at 95%. Asset concentration is modest, with the five largest assets accounting for 60% of recurring revenue. High Ratings Headroom: BSD has a track record of maintaining a strong balance sheet, with leverage (net debt/adjusted inventory) estimated at around 20% as of end-2016. However leverage rose in 2016, from 11% in 2015, driven by acquisitions and development of investment properties, and greater participation in joint ventures with domestic and international developers. Fitch estimates that BSD's leverage would have increased to 27% at end-2016 if debt and assets of the JVs are proportionately consolidated. However BSD's leverage is still considerably lower than the 40% threshold above which Fitch may consider negative rating action. Subsidiary Owns the Investment Properties: Most of BSD's investment property portfolio is held through its 88.56%-owned listed subsidiary, PT Duta Pertiwi Tbk (DUTI). A significant dilution in BSD's ownership of DUTI, although not expected in the medium term, may reduce BSD's access to DUTI's recurring cash flow and increase risk to BSD's creditors. Fitch deducts dividends paid to minorities from recurring EBITDA when computing the recurring EBTIDA net interest coverage ratio, in order to account for the risk of cash leakage to minorities. DERIVATION SUMMARY BSD's rating reflects its strong financial profile, with leverage at around 20% at end-2016. The company also has a strong recurring cash flow base from its portfolio of 17 investment properties and from two hotels. The company expects to add 10 more properties to its investment-property portfolio over the next three years, which could significantly expand its recurring cash flows. However, this expansion comes with a degree of execution risk. BSD's rating compares well with its immediate rating peers, PT Lippo Karawaci Tbk (Lippo, BB-/Stable), and PT Pakuwon Jati Tbk (PWON, BB-/Stable). BSD has the largest property development business among its peers, and its property sales have proven more resilient to downturns. However PWON and Lippo have higher recurring cash flows, which we believe compensates for the latter's smaller property development scale. Lippo's leverage is the highest among its peers, but we believe this is counterbalanced by its greater financing flexibility, with a track record of accessing US dollar bond markets, and successfully churning its mature retail malls and hospitals through the real estate investment trusts it sponsors. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Property sales of IDR6 trillion in 2017 and over IDR7 trillion in 2018 - Increase in land bank of around IDR1.5 trillion annually in 2017-2018 - Around IDR2 trillion of capital expenditure on investment properties annually, in 2017-2018 - Dividends to remain in line with the recent past RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: Fitch does not expect BSD's ratings to be upgraded in the next 24 months, given the company's evolving investment property portfolio compared to higher-rated international peers and the high capex, and execution risks related to the investment property expansion. Over the longer term, the following may result in an upgrade: -Increased scale and granularity of the investment property portfolio, so it generates over USD120 million in recurring EBITDA, with the five largest assets accounting for less than 50% of revenue in this segment -Recurring EBITDA/net interest expense higher than 2.5x (2015: 2.9x) -Leverage sustained below 30% Future Developments That May, Individually Or Collectively, Lead To Negative Rating Action: -Recurring EBITDA/net interest expense sustained below 1.75x -Leverage sustained above 40% LIQUIDITY Comfortable Liquidity: At end-2016 BSD had more than IDR3 trillion of cash, compared with short-term contractual debt maturities of IDR479 billion. Fitch's estimates that free cash flow is likely to remain neutral in 2017, which would further support liquidity. BSD also has IDR3.4 trillion of approved but undrawn credit facilities at its disposal to fund working capital and certain earmarked expenses. The company has a policy of maintaining at least IDR2 trillion of cash on its balance sheet in order to capitalise on opportunistic land acquisitions. FULL LIST OF RATING ACTIONS PT Bumi Serpong Damai Tbk --Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BB-'; Outlook Stable --Senior unsecured rating affirmed at 'BB-' Global Prime Capital Pte. Ltd --Rating on outstanding USD200 million 5.5% senior unsecured bond due in 2023 affirmed at 'BB-' --Rating on outstanding USD78 million 6.75% senior unsecured bond due in 2020 affirmed at 'BB-' Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Bernard Kie Associate Director +62 21 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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