S&P: PT Kawasan Industri Jababeka Tbk. 'B+' Rating Affirmed Following Proposed Refinancing; Outlook Remains Stable
"The affirmation reflects our expectation that KIJA's improved property sales momentum since April 2016 will temper higher leverage from the company's proposed notes issuance," said S&P Global Ratings credit analyst Kah Ling Chan.
KIJA's property sales reached Indonesian rupiah (IDR) 421.3 billion in the quarter ended June 30, 2016. That's a healthy recovery from the first quarter, when KIJA only achieved IDR49 billion in sales. This momentum continued in July and August 2016, when the company sold approximately IDR300 billion. The higher sales were partly due to the launch of KIJA's new Kendal project. This project is proving to be popular because of its Central Java location and it is a cheaper alternative to the east Jakarta industrial enclave.
We are revising our 2016 and 2017 marketing sales projections for KIJA to IDR1.2 trillion and about IDR1.5 trillion respectively. While the 2016 sales projections are only marginally higher than the IDR1.1 trillion we earlier anticipated, the stronger ramp-up of sales at Kendal raises our confidence that the project will contribute about 25% of overall sales by 2017. Our earlier marketing sales forecast for 2017 was about IDR1.2 trillion. In light of KIJA's relatively rapid revenue recognition of land sales, we now project EBITDA of IDR1.2 trillion in 2017, about 15% higher than we earlier anticipated.
Our forecast of higher EBITDA in 2017 mitigates the prospect of higher debt at KIJA this year and next. The company's debt could rise to about IDR4.1 trillion in 2016, compared with our earlier projection of about IDR3.6 trillion. The higher debt is due to expenses, including exchange premium and transaction costs, related to the proposed issuance of US$200 million in new notes, as well as the drawdown of working capital loans. Under our base case, KIJA's debt-to-EBITDA ratio could reach 3.8x in 2016, then decline to about 3.3x by 2017 amid higher property sales and EBITDA.
We estimate that about IDR1.3 trillion in property sales in 2017 (compared with our forecast of IDR1.5 trillion) would keep the debt-to-EBITDA ratio below our downgrade trigger of 3.5x. We regard this level as achievable because it does not entail a rapid growth in marketing sales at Kendal.
Under our base case, we also anticipate a stable debt level of close to IDR4 trillion through 2018. We project slightly positive annual free operating cash flow of about IDR20 billion in 2016 and 2017. In our view, KIJA will continue to acquire land, especially in its new Kendal project. But we expect operating cash flow and its cash balance to be sufficient to fund land acquisitions with no need for additional debt.
"The 'B+' rating on KIJA still reflects our view of the company's relatively narrow business profile. The company's Kendal project could contribute up to 25% of sales through 2017. But more than 60% is likely to come from its Cikarang Industrial estate over the period," said Ms. Chan.
The company has some diversity beyond land sales. Its infrastructure services, power plant, and dry port businesses continue to perform in line with our expectations at 25%-30% of the company's EBITDA in the next two years. A faulty boiler, which affected power plant operations for about three months, was swiftly replaced and will only have a modest impact on EBITDA in 2016.
KIJA intends to use most of the proceeds from the proposed notes to refinance part of the senior unsecured notes issued by Jababeka International B. V. and guaranteed by KIJA, and pay transaction-related premium and expenses.
Based on the terms and conditions we reviewed, the company is seeking to relax a certain number of covenants. Those include a relaxed fixed charge coverage ratio of 2.25x (versus 2.5x for the 2019 notes), allowing moderately higher debt incurrence and an increase in the permitted investment basket to accommodate certain investments in joint ventures or unrestricted subsidiaries to 15% of total assets (versus 7.5% of total assets in the 2019 bonds). In addition, KIJA is seeking to modify the change of control and the application of proceeds from asset sales without unanimous consent prior to the occurrence of such events. We regard these relaxed covenants as broadly credit neutral, because we expect KIJA to stay prudent in its spending and to not require additional debt. We also believe the company is likely to keep its expansion focus on industrial land, with no additional expansion of its power plant. We would review our assessment of KIJA's financial policies in the event that the company uses the relaxed covenants to step up its spending or undertake investments beyond our base case.
"The stable outlook reflects our expectation that the debt-to-EBITDA ratio will fall below 3.5x in 2017 amid improving marketing sales, steady margins, and stabilized debt levels. It also reflects our expectations of continued stable income streams from the company's power plant, infrastructure services, and dry port operations during this time," said Ms. Chan.
We may lower the rating if the company's debt-to-EBITDA ratio exceeds 3.5x on a prolonged basis. This could materialize if: (1) KIJA's marketing sales stay below IDR1.3 trillion amid persisting spending; or (2) KIJA deviates from its core business and strategy, and makes debt-funded investments larger than what we currently expect.
Rating upside is limited in the next 12 months. We may raise the rating on KIJA if we see a more established track record of prudent financial management. We may also upgrade the company if its recurring income increases meaningfully and new development projects reduce its dependence on the Kota Jababeka industrial estate.