Fitch Ratings has revised the Outlook on Indonesia-based property developer PT Ciputra Development Tbk’s (CTRA) Long-Term Issuer Default Rating (IDR) to Positive, from Stable, and has affirmed the rating at ‘B+’. The agency has also affirmed the long-term rating on CTRA’s SGD150 million unsecured notes due 2 February 2026 at ‘B+’ and its Recovery Rating at RR4′.
The Positive Outlook reflects our view that CTRA will sustain its attributable contracted sales, excluding minorities’ share, at above IDR5 trillion over the medium term. The company’s contracted sales scale would then be comparable with that of higher-rated peers. This, combined with its low leverage, would support a rating upgrade in 12-18 months.
CTRA’s IDR is underpinned by its domestically diversified operating cash flow and land bank across several key cities, projects and price points. This has allowed the company to tailor its products to suit changing demand patterns through economic cycles.
KEY RATING DRIVERS
Strong Contracted Sales Growth: We expect contracted sales to reach IDR5.5 trillion in 2022 and to continue rising, supported by an improving operating environment as more of the population is vaccinated for Covid-19, further supported by the wealth-effect from elevated commodity export prices. CTRA reported attributable contracted sales of IDR5.0 trillion in 2021. This represented a 33% yoy rise and was higher than Fitch’s estimate of IDR4.5 trillion, despite limited large-scale project launches amid the mobility restrictions imposed during July-August 2021 to curb the coronavirus spread.
Low Leverage: We expect leverage – defined as net debt/adjusted inventory – to remain at around 15% in the next 12-18 months (end-September 2021: 14%), as we think CTRA will maintain a cautious approach to land banking and capex until there is more visibility around a sustained economic recovery. Leverage is thus likely to remain well below the 40% threshold required for a rating upgrade in the next 12-18 months. This will leave headroom for further investment, but we expect a measured approach in line with the company’s record.
Risks to Sustained Higher Sales: CTRA reports that over 25% of its 2021 contracted sales were driven by the VAT rebate. The government has extended the rebate until June 2022, albeit at half the discount. However, the pace of CTRA’s presales growth may slow if the VAT rebate is not extended beyond June 2022 or if domestic interest rates rise faster the market expects. Further operational disruption from new coronavirus variants could also derail the positive trajectory.
Mortgages Boost Cash Collection: We expect cash flow from operation to improve in 2022 on better presales and a higher mix of mortgage-loan funded sales. The loosening of mortgage-loan rules since early 2021, which allow banks to disburse up to 90% of loans to developers up front, have been a key driver of stronger cash collection. CTRA reported consolidated cash collection of IDR6.3 trillion in 9M21, up by 40% yoy, with mortgage-funded sales rising to 58%, from 50%, over the period, displacing instalment-funded sales.
Neutral Free Cash Flow: We assume that CTRA will pay out all of its profit in the form of dividends, such that free cash flow (FCF) remains neutral to marginally negative in 2022-2024. This will exceed the 10%-15% pay-out ratio seen historically. The company has not announced any specific expansion or acquisition plans and we believe it may invest in business growth over the longer term should strong cash collection continue amid a sustained economic recovery.
Gradual Recovery at Malls and Hotels: Uneven vaccination rates across Indonesia pose a risk to the recovery of CTRA’s non-development cash flow, which mainly stem from shopping malls and hotels. CTRA’s hospitals have partly offset the weakness in malls and hotels due to high demand for Covid-19 tests and related care. Meanwhile, non-Covid-19 revenue has rebounded. Non-development revenue fell to 18% of total revenue in 9M21, but we think it will return to around 25% from 2023 – the pre-2020 level, if the pandemic is brought under control.
Large Land Bank; Joint Operations: CTRA owns more than 2,300 hectares of land, with a large presence in the main urban areas of Greater Jakarta and Greater Surabaya. The large land bank ensures project longevity and healthy cash flow, especially amid rising land prices. CTRA develops projects with other land owners on a profit- or revenue-sharing basis. It reports joint operations on a proportionally consolidated basis, while Fitch proportionally consolidates its key joint ventures (JV) – reported using the equity method – when calculating credit metrics. The JVs have limited debt and cash.
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Fitch Upgrades Ciputra Development to ‘BB-‘; Outlook Stable
