Fitch Affirms Jababeka at 'B+'/'A(idn)'; Outlook Stable
'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
Weak Start; Presales Improving: Jababeka reported a slight 1% decline in its presales in 2015 to IDR1trn due to weaker sales in its industrial segment. Demand continued to be weak in 1Q16, but improved significantly in 2Q16, with presales growing by 88% yoy in 2Q16. Fitch expects the recovery to be sustained, and forecasts Jababeka to book presales of IDR1.2trn and IDR1.5trn in 2016 and 2017, respectively.
Solid Recurring Coverage: Jababeka's rating reflects strong recurring interest coverage from its 130MW power plant (PP1), which is operated under a 20-year power purchase agreement (PPA) with the state electricity company PT Perusahaan Listrik Negara (Persero) (BBB-/Stable). This business provides good earnings visibility and a natural hedge for Jababeka's US dollar-denominated borrowings, as it operates under a cost pass-through mechanism and the revenues are pegged to US dollars.
Fitch expects Jababeka's recurring interest cover to temporarily decline in 2016 because of leakage in the power plant. The company says permanent repairs are already completed as of 19 August 2016 and all machinery is currently operating at the same capacity and efficiency as before the leakage was found. Fitch expects Jababeka's recurring interest cover to be 0.8x and 1.3x in 2016 and 2017, respectively.
Flexible Capex: Jababeka's capex for the next few years will be limited to developing its infrastructure facilities and increasing the efficiency of PP1. This, coupled with the discretionary nature of land acquisitions, allows Jababeka to accumulate cash buffers and strengthen its liquidity profile. However, this could change markedly should the company decide to proceed with investment in a second power plant.
Growing Residential, Commercial Property Segment: Jababeka's residential and commercial property business accounted for 55% of total marketing sales in 2015 compared with 14% in 2011. There is growing demand in this segment, and Fitch expects it to remain robust due to the strategic location of the company's Cikarang estate in West Java and the increasing need for homes for the growing number of industrial workers in the area.
Long-Term Diversification Benefits: Jababeka, together with Singapore's Sembcorp, is developing a new industrial complex in Kendal, Central Java, which is modelled after Cikarang. Relocating labour-intensive production out from Cikarang makes sense in the long run given the lower minimum wage in Central Java. Upon successful execution, Kendal will provide Jababeka with diversification benefit and traction for future growth.
Project Concentration and Forex Risks: Jababeka's rating is primarily constrained by the high concentration of its business in Cikarang, which is expected to account for 70%-80% of presales in the next 24-36 months. Fitch believes the concentration risk will gradually decrease as contribution from the Kendal estate grows.
Jababeka has hedged USD200m out of its USD260m bonds at various upper strike prices, the highest of which is at IDR15,000 to USD1. While the company is still exposed to currency fluctuations, we believe risk is manageable as there are no immediate liquidity concerns given that Jababeka's USD260m senior notes are due only in 2019, and its interest expenses are sufficiently covered by its recurring income stream.
Fitch's key assumptions within the rating case for Jababeka include:
- Presales of IDR1.2trn and IDR1.5trn in 2016 and 2017, respectively
- Land acquisition capex of IDR400bn-500bn in 2016-2017
- Construction capex of IDR400bn-500bn in 2016-2017
Positive rating action is not expected due to the limited project scale and exposure to the highly cyclical industrial development business.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Recurring EBITDA/ interest expense at less than 1x for the IDR, or less than 1.2x for the National Long Term rating, on a sustained basis (2016F: 0.8x)
- Presales/ gross debt at less than 40% on a sustained basis (2016F: 35%)
- Net debt/ net inventory at more than 60% on a sustained basis (2016F: 48%)