PT Pakuwon Jati Tbk. Upgraded To #BB# From #BB-# On Improving Financial Outlook Stable

Stocks and Financial Services Press Releases Thursday June 7, 2018 16:15
SINGAPORE--7 Jun--S&P Global Ratings

SINGAPORE (S&P Global Ratings) June 7, 2018--S&P Global Ratings raised its long-term issuer credit rating on PT Pakuwon Jati Tbk. (Pakuwon) to 'BB' from 'BB-'. The outlook is stable. At the same time, we raised our long-term issue rating on the senior unsecured notes that Pakuwon guarantees to 'BB' from 'BB-'. Pakuwon is an Indonesian real estate development and investment company.

We raised the rating because we believe Pakuwon's leverage will gradually improve over the next two years owing to the company's steady growth in property sales, increasing recurring income, manageable capital spending, and stable debt balance. We also expect Pakuwon's financial stability and debt servicing capability to materially improve as the company ramps up its investment property portfolio. We estimate that Pakuwon's EBITDA interest coverage will improve to 7.0x-7.5x over the next two years, from 6.1x in 2017.

We expect Pakuwon to maintain financial discipline as it continues to pursue growth. The company has a record of maintaining moderate leverage while executing its growth strategy over the industry cycle. We forecast the debt-to-EBITDA ratio to be 1.6x-1.7x in 2018-2020, compared with 2.0x in 2017, underpinned by Pakuwon's stable debt balance of Indonesian rupiah (IDR) 6.0 trillion over the next 24 months. We anticipate Pakuwon's capital spending to be about IDR2.1 trillion in 2018 and IDR1.1 trillion in 2019 to support construction of investment properties and for land purchases. We do not expect the company to incur significant additional debt because this capital spending will be predominantly financed by growing internally generated cash flows.

In our view, Pakuwon is more resilient against volatility in the property market than its domestic peers owing to the company's high quality offerings in existing matured townships in Jakarta and Surabaya. Despite the recent softness in Indonesia's property market, Pakuwon is one of the few domestic developers that met our property sales expectation in 2017. Unlike many developers that increasingly depended on land sales to achieve their sales target and protect their balance sheet and cash flow, Pakuwon was able to do so by selling residential and commercial properties rather than depleting its land bank. Such a strategy also ensures Pakuwon's future profitability due to its low cost land bank. Pakuwon's high quality properties and well diversified sales across major five matured townships support its resilience. We forecast that the company's property sales will be IDR2.6 trillion-IDR3.1 trillion in 2018-2020. As of March 31, 2018, Pakuwon achieved about IDR605 billion of property sales, or 24% of its 2018 target.

We believe Pakuwon's significant and growing recurring income insulates the company against volatility in the property market. The prime locations of the company's rental investment properties in Jakarta and Surabaya ensure occupancy rates of more than 90%. We believe Pakuwon can sustain this occupancy level, given its good quality assets in strategic locations. Over the past five years, the company has more than doubled its recurring income through launches of new malls and hotels. We anticipate that Pakuwon's recurring income will grow by 7%-14% each year for the next two years, leveraging on the company's experience in developing shopping malls and hotels. Such growth should translate into annual EBITDA from investment properties of IDR1.8 trillion–IDR2.0 trillion in 2018-2020, which is about 50% of Pakuwon's consolidated EBITDA. In our view, EBITDA from investment properties not only provides the company a good financial buffer to offset volatility in property development activities, but also adequately covers its annual interest expense of IDR490 billion–IDR510 billion, even if EBITDA from development declined dramatically.

The stable outlook reflects our view that Pakuwon will extend its record of careful growth over the next 12-24 months, at a time when acquisition opportunities may be abundant in a still subdued Indonesian property market. We expect the company to continue to have good project execution and maintain consistent cash flow adequacy over the period.

We could lower the rating if we expect Pakuwon's debt-to-EBITDA ratio to consistently remain above 2.5x. This would primarily happen if the company departs from its cautious financial policies. Given the high share of recurring income, a marked increase in leverage would require a steep rise in Pakuwon's capital spending or sizable land acquisitions.

We may raise the rating if Pakuwon materially expands its operations and improves its scale by diversifying projects while maintaining a 50%-50% balance between recurring and development revenue and a debt-to-EBITDA ratio of about 2x or lower over the next 12-24 months.


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