Fitch Ratings has affirmed Indonesia-based homebuilder PT Bumi Serpong Damai Tbk's (BSD) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-'.

The Outlook is Stable.

The rating is driven by BSD's position as one of Indonesia's leading homebuilders by contracted sales and land bank. The company's scalable township development model and focus on landed homes across diverse price points allows for mostly steady operating cash flow for BSD across economic cycles, keeping leverage low. BSD's rating is moderated by its relative scale to higher-rated global peers.

Key Rating Drivers

Steady Contracted Sales: We expect BSD's attributable contracted sales - which excludes the share of minority interests and land plot sales to joint ventures (JVs) - to remain steady at around IDR5.5 trillion in the next two years, despite rising inflation and interest rates as well as slower economic growth that will moderate housing demand, especially for investments. The expiry of the value-added tax rebate on completed properties in 2022, and a modest outlook for prices of key export commodities such as palm oil and coal, which impact wealth creation domestically, will weigh on demand.

Nevertheless, demand from first-time homebuyers and owner-occupiers should remain healthy, driven by landed homes priced at or below IDR2 billion, which are BSD's mainstay. Fitch forecasts Indonesia's GDP growth to remain healthy at 4.8% in 2023, before rising to 5.6% in 2024. Domestic banks have remained supportive of consumer home loans, holding loan interest rates largely steady since January 2022, despite benchmark interest rates rising by 225bp. Around 70% of BSD's sales are funded by mortgages, with 20% paid in cash, and the remainder via cash instalments.

Foreign JVs Boost Appeal: Contracted sales from BSD's key JVs with foreign partners should remain healthy at around 20% of the mix, supported by the appeal of BSD's mature township BSD City, its improving connectivity, and the limited supply of similar premium offerings ranging from IDR7 billion to IDR30 billion per home (around USD0.5 million-2 million). The JVs include tie-ups with Hongkong Land and Mitsubishi Corporation, among others, and are debt-free. BSD sold IDR1.6 trillion of land plots in 2022 to its JVs to support their medium-term growth.

Moderating Cash Flow, Low Leverage: Fitch expects BSD's cash collections from property sales to moderate in the next 12-18 months from multi-year highs seen in the last two years. This is because the surge in collections, which followed the relaxation of mortgage loan disbursement rules at end-2020, will normalise. Construction cost inflation and capex of around IDR1.2 trillion, mostly on completing the Serpong-Balarajah toll road between BSD City and Jakarta in 2023, will also pressure cash flow. We forecast leverage - net debt/net property assets - to rise modestly to around 10% (9M22: 4%).

Modest Non-Development Income: We expect BSD's non-development revenue to rise to around 15% in the next two years, from an estimated 10% in 2022. The rise is underpinned by a gradual improvement in rental income from its portfolio of offices, as workers return amid an apparent tapering off of pandemic-era telecommuting. Non-development revenue will also stem from rising toll-road income, as BSD owns the toll-road concession. Up to 10km of the toll road will be completed in the project's second phase in 2023, and should boost usage. The first 5km was operational in October 2022.

Large, Low-Cost Land Bank: BSD owns more than 4,600ha of landbank, most of it situated in Tangerang province, in and around BSD City. It is sufficient for over 20 years of contracted sales and provides the company with the ability to tailor its landed homes to suit varying consumer demand and price points through diverse projects. The large land bank also provides financial flexibility to scale back land acquisitions when home sales are weak. We expect BSD to spend a modest IDR800 billion-900 billion per year on land purchases to form contiguous plots in support of medium-term projects.

Notched up from Weaker Parent: BSD's rating is notched up from that of its weaker parent Sinarmas Land Limited (SML), given the parent's 'Porous' access and control and 'Porous' ring-fencing, in line with Fitch's Parent and Subsidiary Rating Linkage Criteria. Fitch views the restrictions imposed on dividend payments and affiliate transactions via the company's US dollar debt, which make up nearly half of its borrowings, and its listing on the Jakarta stock exchange as providing a degree of ringfencing.

Furthermore, BSD raises its non-equity funding independently of SML, which allows for 'Porous' access and control along with the presence of significant minority shareholders, regional partners via its joint ventures and functional board separation.

Derivation Summary

BSD's 'BB-' rating may be compared with that of Indonesia-based PT Pakuwon Jati Tbk (BB/Stable), PT Ciputra Development Tbk (CTRA, BB-/Stable), and Vietnam-based BIM Land Joint Stock Company (B/Stable).

Pakuwon is one of Indonesia's leading shopping-mall owners and a mixed-use property developer. The majority of its operating cash flow stems from its portfolio of shopping malls, hotels and offices. Pakuwon is rated one notch higher than BSD because of its large non-development cash flow that has proven more resilient to economic downturns than homebuilding. This offsets Pakuwon's smaller property-development business, although the company prudently manages its development risk, funding most of its construction activities with customer presales rather than debt.

BSD is rated at the same level as CTRA to reflect their similar homebuilding scale in terms of annual attributable presales, record of maintaining low leverage and solid liquidity. CTRA's property business is more geographically diversified than BSD's, given the latter's focus within its BSD City township. However, BSD City is more established than its peers' townships, with a stronger record of sustained sales.

BSD also has a larger land bank than CTRA, which has given it the flexibility to sell land to regional property developers for collaboration, raising the appeal of its township and boosting financial flexibility. Both issuers have portfolios of mostly small commercial properties, mainly in office and retail, that provide a degree of cash flow diversification.

BSD is rated two notches higher than BIM Land on account of BSD's stronger business profile with exposure mainly to residential development cash flow, which is more defensive than BIM Land's significant exposure to hospitality-led property development.

BSD also has larger non-development cash flow from its portfolio of mostly offices, for which there is healthy tenant demand. In contrast, BIM Land's non-development income stems from a smaller portfolio of hospitality properties such as condotels and villas in several coastal townships, which have more cyclical demand. BSD also has a stronger financial profile with low leverage and solid liquidity.

Key Assumptions

Fitch's key assumptions within our rating case for the issuer:

Contracted sales to remain steady at around IDR5.5 trillion in 2023-2024

Cash collections from contracted sales to moderate to IDR5.5 trillion in 2023-2024 (2021: IDR9.2 trillion) on normalising collections from bank mortgages

Cash collections from non-development sources of IDR1.6 trillion in 2023 and IDR1.9 trillion in 2024

Construction costs on development properties of around IDR2 trillion annually in 2023-2024 (2021: IDR2.2 trillion)

Capex of IDR1.2 trillion in 2023, mainly on completing the toll road

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

We do not expect positive rating action in the next 24 months, as we expect BSD's attributable contracted sales to remain steady;

Over the longer term, a significant and sustained increase in attributable contracted sales while maintaining a conservative financial profile could lead to a rating upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Attributable pre-sales of less than IDR5 trillion on a sustained basis;

Leverage sustained above 40%

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Comfortable Liquidity, Balanced Funding Mix: BSD has a track record of maintaining strong liquidity. Its cash balance stood at IDR10.5 trillion at end-September 2022, compared with current debt maturities of IDR1.6 trillion comprising of mostly loans from domestic banks.

It prepaid its USD270 million unsecured 5.5% bond in October 2022, around a year ahead of its maturity, using mostly cash on hand. Following the prepayment, we view BSD as having achieved a more balanced funding structure with around 52% of debt comprising of US dollar-denominated unsecured cross-border bonds, 12% of rupiah-denominated domestic bonds, and 37% of rupiah-denominated domestic bank debt.

BSD has over IDR4 trillion of committed undrawn bank facilities which it can use for general corporate purposes and working capital across the company and its subsidiaries, as well as a further IDR2.2 trillion undrawn term-loan facility for the construction of its toll road, although the company has mostly used its own cash for this purpose.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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