OREANDA-NEWS. Fitch Ratings has affirmed PT Modernland Realty Tbk's (Modernland) Long-Term Issuer Default Rating at 'B' with a Stable Outlook. The agency has also affirmed Modernland's senior unsecured rating and rating on its outstanding notes at 'B' with a Recovery Rating of 'RR4'. The notes are issued by wholly owned subsidiaries Modernland Overseas Pte Ltd and Marquee Land Pte Ltd and guaranteed by Modernland and certain subsidiaries.

The company's core businesses are in developing industrial estates and residential townships in Cikande Tangerang and East Jakarta, respectively.

KEY RATING DRIVERS

Sufficient Presales Despite Challenges: The affirmation of Modernland's rating is supported by sufficient presales, despite challenging economic conditions and weak sentiment for residential and industrial properties. Modernland booked 141 ha of industrial land sales in Cikande in 1H15, and has another 34 ha in the pipeline for 3Q15. This, and the USD45.4m in cash flow from the sale of land to PT Aeon Mall Indonesia, are sufficient to meet Modernland's debt servicing needs and fund land- banking activity.

Volatile Cash Flows, Low Development Risk: Modernland's exposure to industrial land sales leads to more volatile cash flows compared with that of peers in the residential segment. Although residential sales account for a larger share of its cash flows, industrial estate development will remain an important contributor to Modernland's cash flows. Modernland's low development risk in the industrial sector is an important mitigant for its volatile cash flows.

The company has a good 20-year track record in developing industrial estates, and it has built strong relationships with tenants. Its flagship Cikande industrial estate has a very low average land cost compared with the current average selling price of IDR1.3m/ sqm, and Modernland has enough land to continue developing there for more than five years. Fitch also believes Modernland can build on its success in Cikande and use a similar business model for its future developments.

Limited Residential Track Record: Fitch estimates the residential segment will account for more than 50% of Modernland's presales over the medium term, driven by sales at Jakarta Garden City (JGC) and the upcoming project in Bekasi. The company's track record in developing large-scale integrated residential projects, however, is limited relative to other rated developers. The JGC project has yet to reach optimum scale, with the success of the project hinging on the completion of the Aeon mall and the opening of a new access road. Both components are on track for completion - the new road is due to open in September 2015 and and the Aeon mall will be completed in 2017.

Strong One-off Land Sales: Modernland sold 110 ha of industrial land in Cikande to Charoen Pokphand in 2014 and another 94.5 ha in 2015. The two transactions were worth IDR1.2trn (USD84m) in total, and company expects to receive the final cash instalment in 18 months. This transaction, combined with one-off land sales to Aeon at JGC worth USD45.4m provides high cash flow visibility for at least the next 12 months. Fitch believes this mitigates the risk of slower cash collection from land sales to PT Alam Sutera Realty Tbk (ASRI, B+/ Stable).

ASRI Land Sales Delayed: Cash collection from land sales to ASRI has been slower than expected. The rating case assumes collection will be stretched by around one year to 2017. ASRI's pre-sales for the project was much lower than estimated, which affected its capex and land acquisitions. Nevertheless ASRI remains committed to finalise the acquisition, because of the plot's strategic location near ASRI's flagship project at Alam Sutera Serpong and the attractive acquisition price at IDR2m/sqm compared with the current average selling price of IDR15m.

Well-Laddered Debt Maturity: Modernland has no significant debt maturity until 2019 when its USD191m notes are due. It has refinanced 61.6% of its 2016 notes (USD92m) with the proceeds of the 2019 notes, and used the balance to refinance existing bank loans. Modernland is also a repeat issuer in the local capital market; it most recently issued IDR750bn of notes in July 2015 to refinance IDR250bn of notes due in December 2015 and to accelerate land acquisition in Bekasi.

FX Risk Manageable: Modernland has hedged the entire outstanding amount of US dollar bonds at various upper strike prices, the highest of which is at IDR15,000 to USD1. While the company is still exposed to FX risks, we believe risk is manageable. This is because only USD58m will mature in 12 months, while USD45.4m from the land sales to Aeon will become available. Modernland wide profit margins are also sufficient to absorb short-term currency volatility.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- 50%-75% discount to management's pre-sales target
- Average selling price to increase 10% yoy
- ASRI land sales are delayed by one year
- Aeon mall development progresses as planned
- Bekasi land acquisition is executed as planned

RATING SENSITIVITIES
Positive: No positive rating action is expected in the medium term due to the company's small development scale, currency mismatches and limited recurring income

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Presales/ gross debt sustained at less than 40% (2015F: 60%)