Fitch Affirms Indonesia's Jababeka at 'B '; Outlook Stable
The company's core businesses are in developing industrial estates and the supporting infrastructure, and township management. Jababeka's flagship industrial estate in Cikarang (35km from Jakarta) is equipped with a 130MW power plant and a dry port. The IDRs and senior debt ratings have been affirmed because Jababeka demonstrates solid recurring interest coverage, sufficient leverage and improving liquidity.
KEY RATING DRIVERS
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 PLN (BBB-/Stable). This business provides good earnings visibility and also 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 the US dollars. In 2014, Jababeka's recurring interest cover was 1.1x, and Fitch expects the ratio to reach 1.3x in 2015 and 1.5x in 2016.
Limited Capex, Improved Liquidity: The company is focused on improving PP1's efficiency, targeting to reach 95% of capacity declared to PLN by the end of 2015, up from 93% in 2014. Thus, Jababeka's capex for the next few years will be limited to developing its infrastructure facilities. 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 Segment: Jababeka's residential and commercial property business accounted for 55% of total marketing sales in 2014 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 and the increasing need for homes for the growing number of industrial workers in the area.
While this diversifies Jababeka's exposure to the more cyclical industrial segment, revenue for the residential and commercial segment takes a longer time to be recognised compared with the industrial segment, and working capital might be stretched. To monitor the impact of the growing contribution of the residential and commercial business on Jababeka's leverage, we have introduced a new rating trigger, net debt/ net inventory.
Long-Term Diversification Benefits: Jababeka, together with Singapore's Sembcorp, will develop a new industrial complex in Kendal, Central Java, which is modelled after Cikarang. Relocating labour-intensive production out from Cikarang makes more 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 Risk: Jababeka's rating is primarily constrained by its highly concentrated business in Cikarang, which is expected to contribute over 80% in marketing sales in the next 24 months. Going forward, with the increasing contribution from the Kendal estate, we believe that concentration risk should gradually dissipate.
Forex Risk: The Indonesian rupiah has depreciated by over 10% against the US dollar so far in 2015, and has affected Jababeka's gross debt value. One of the rating triggers is the level of presales/ gross debt, which is heavily affected by the exchange rate. In 2014, the ratio stood at 38% and we expect it to reach 35%, 46% and 65% in 2015, 2016 and 2017, respectively. It should be noted that there is no immediate liquidity concerns as Jababeka's USD260m senior notes are due only in 2019.
Fitch's key assumptions within the rating case for Jababeka include:
- Cikarang industrial land sales volume of 13ha, 15ha and 17.5ha in 2015, 2016 and 2017, respectively
- Kendal industrial land sales volume of 15ha, 20ha and 30ha in 2015, 2016 and 2017, respectively
- PP1 capacity declared to PLN of 95% for 2015-2017
- Electricity buyback of 10MW, 13MW and 19MW for 2015, 2016 and 2017 at 10% margin
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 on a sustained basis (2015 forecast: 1.3x)
- Presales/ gross debt at less than 40% on a sustained basis (2015 forecast: 34.5%)
- Net debt/ net inventory at more than 60% on a sustained basis (2015 forecast: 39.9%)