Fitch Ratings – Jakarta – 20 Jan 2023: Fitch Ratings has upgraded Indonesia-based property developer PT Ciputra Development Tbk’s (CTRA) Long-Term Issuer Default Rating (IDR) to ‘BB-‘ from ‘B+’. The Outlook is Stable. Fitch has also upgraded the senior unsecured rating on CTRA’s SGD150 million unsecured notes due 2 February 2026 to ‘BB-‘ from ‘B+’.
The ‘BB-‘ Long Term IDR and Stable Outlook reflects our view that CTRA will maintain its annual attributable contracted sales, excluding minorities’ share, above IDR5 trillion over the medium term. This is supported by CTRA’s well-diversified contracted sales mix and land bank across several key cities, projects and price points, allowing CTRA to nimbly cater to changing consumer preferences. Consequently, we expect the company can navigate softer housing-demand this year amid rising inflation and interest rates.
The rating is also supported by CTRA’s exceptionally strong balance sheet, which provides the company with significant financial flexibility.
KEY RATING DRIVERS
Steady Contracted Sales: Fitch forecasts CTRA to achieve attributable annual contracted sales of around IDR5.3 trillion-5.5 trillion in 2023-2024, despite a moderating outlook for housing demand amid rising interest rates and higher inflation in the next 12 months. Domestic banks have so far remained supportive of mortgage loans with mortgage interest-rates rising by around 25bp in 2022, against a 200bp hike in Bank Indonesia’s reference rates. The majority of contracted sales in 2022 were paid through mortgages (62%), with cash (21%) and instalments (18%) making up the rest.
We think CTRA’s exceptionally low leverage (net debt/net property assets) in the low single digits, positions it well to mitigate a slowdown in mortgage-funded contracted sales if domestic banks’ appetites wane in the near term. The company can offer customers in-house instalment schemes instead to finance home sales, which will raise leverage somewhat but should allow CTRA to remain well within the sensitivities for its ‘BB-‘ rating.
VAT Rebate Expiry Neutral: We think CTRA’s contracted sales will be resilient after the expiry of the Indonesian government’s VAT rebate on home sales in September 2022. The majority of CTRA’s strong contracted sales performance in 3Q22 did not use the incentive, which supports our view that increases in underlying housing demand are less reliant on government incentives.
Diversified Sales Mix: We believe that CTRA’s geographic and product diversification increase the stability of its contracted sales. Geographic diversification benefited contracted sales in 2022, with declining contracted sales in Greater Jakarta offset by increased sales in Sulawesi and Greater Surabaya. CTRA’s exposure to low, mid and high-end products also provides flexibility to tailor its housing supply to market demand. Mid to high-end products greater than IDR2 billion were responsible for the majority of sales growth in 2022.
Leverage Remains Low: Fitch forecasts CTRA’s leverage to rise but remain below 10% in 2023 (end-September 2022: 3%). The consolidated cash balance was significant at around IDR8.4 trillion at end-September 2022, and we estimate it was about IDR8 trillion excluding the share of minorities. However, we expect the company to remain disciplined when deploying this cash. Uses of cash will include a measured development of new shopping malls and hospitals in its existing townships, a moderate increase in dividends and a gradual repayment of gross debt.
Negative Free Cash Flow: We expect CTRA will generate negative free cash flow (FCF) in 2023 and 2024. This is based on Fitch’s estimates of a moderation in contracted sales, higher capex and slower cash collections, assuming that some customers switch from mortgage funding to cash instalments.
Increasing Non-Development Revenue: Fitch forecasts non-development revenue will increase to 21% of total revenue in 2024 from 17% in 2021. We forecast shopping mall and hotel revenue will continue to improve in 2023. Shopping mall revenue rose by 38% yoy to end-September 2022 as Covid-19-related rental discounts were removed, and hotel revenue rose by 84% yoy on the return of domestic business travel, the main driver of demand for CTRA’s hotels. We expect hospital-related revenue will normalise to a lower level as result of the reduction in Covid-related healthcare services.
Large Land Bank, Joint-Operations: CTRA owns a land bank of over 2,200 hectares, with a larger presence in the main urban areas of Greater Jakarta and Greater Surabaya. The large land bank provides CTRA with the flexibility and assurance that it can continue to develop projects in the long term. The company also 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.
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Fitch Revises Outlook on Ciputra Development to Positive; Affirms…
