OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based PT Alam Sutera Realty Tbk's (ASRI) Long-Term Issuer Default Rating at 'B+' with a Stable Outlook. Fitch has also affirmed the long-term ratings on the outstanding US dollar bonds issued by Alam Synergy Pte Ltd and guaranteed by ASRI at 'B+', with a Recovery Rating of 'RR4'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
Satisfactory Presales: The affirmation of ASRI's ratings reflects its satisfactory presales in 2014 amid a somewhat uncertain domestic environment that delayed planned project launches towards mid to late 2014. ASRI achieved 85% of its 2014 sales target - amounting to IDR4.3tn (USD350m) - amid tighter mortgage regulations for residential property purchases that were enforced in late-2013, as well as the uncertainty created by Indonesia's presidential elections in July 2014.

Fitch estimates that ASRI's presales/gross debt ratio slipped to around 0.7x at end-2014 from 1.0x in 2013, which is lower than the 0.75x threshold below which negative rating action may be considered. This is marginally weaker than Fitch's previous expectations. However the agency expects presales to pick up in 2015 on the back of higher economic activity and less uncertainty in the domestic front. Consequently ASRI's presales / gross debt should improve to more than 0.8x by end-2015.

Commercial Sales - Diverse but Risky: Commercial land sales accounted for a little over half of ASRI's 2014 presales, as the company had the flexibility to alter its strategy in the face of challenges in the residential markets. Fitch considers this a credit strength. At the same time the agency notes that a sustained increase in reliance on commercial property in ASRI's sales mix will increase the company's business risk, as commercial property sales are more susceptible to economic cycles. The agency expects commercial property sales to account for a lower 35%-40% of 2015 presales.

Improving Investment Property Income: ASRI generates modest profits from renting out its small investment property portfolio, which includes its shopping mall in its Alam Sutera township and its cultural park in Bali. Profits from investment property rentals are more stable than property development income and lowers business risk to an extent. Fitch estimates that EBITDA from investment property rentals covered around 0.2x of ASRI's total cash interest costs in 2014. The agency expects this to improve to 0.4x by end-2015 due to improving occupancy in ASRI's mall, as well as growing visitor arrivals at its cultural park.

Established Track Record: The ratings recognise ASRI's low-cost, large land bank of over 22 million square meters, strategic advantages of its main development locations, and track record in successful project executions. ASRI is one of the pioneers in developing large-scale townships in Serpong, which is now a popular alternative to other areas in Greater Jakarta. Fitch expects ASRI to be able to build on its success in Serpong for its new project in Pasar Kemis as well as its high-rise residential and office buildings. For example the company launched a residential cluster in its Pasar Kemis project in February 2015 and immediately sold 102 units out of a total of 447 on offer. The project continues to record robust growth in average selling prices with an annual increase of 32%-42% among its various clusters during 2014.

KEY ASSUPMTIONS
Fitch's key assumptions within our rating case for the issuer include:
- 2015 presales increase by 14% from 2014
- EBITDA margin stays above 50%
- Sales from commercial properties will account for about 35%-40% of the total
- Investment property EBITDA will cover 0.4x of cash interest expenses by end-2015

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-A sustained weakening in sales turnover such that the presales/gross debt ratio is below 0.75x (2015 projection: 0.8x) on a sustained basis.
- A sustained increase in leverage above 60% (end-September 2014: 48%; 2015 projection: 50%). Leverage is the ratio of debt less unrestricted cash and hedging benefits to the sum of land and inventory, investment property and advance payments for land but excluding sales advances from customers.
-An increase in ASRI's exposure to non-core businesses

Positive rating action is not expected due to the company's small scale and limited project diversification compared with higher-rated property developers.

FULL LIST OF RATING ACTIONS

PT Alam Sutera Realty Tbk
- Long-Term, IDR affirmed at 'B+'; Outlook Stable

Alam Synergy Pte Ltd
- Outstanding USD235m 6.95% notes due in 2020, affirmed at 'B+' and 'RR4'
- Outstanding USD225m 9% notes due in 2019, affirmed at 'B+' and 'RR4'