Meikarta Scandal Shaking Lippo Group’s Business Tree

Penulis: Amal Ihsan Hadian

Editor: Yura Syahrul

23/10/2018, 15.15 WIB

Referring to the Altman Z-score calculation analysis, several Lippo Group companies actually have a high probability of bankruptcy.

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Warning from Rating Agencies

Global rating agencies has also released information about Meikarta bribery case against the Lippo Group. According to Moody’s Investors Service, the alleged bribery case becomes a negative sentiment for the performance of the Lippo Group’s publicly listed companies, especially Lippo Karawaci. Investor and consumer confidence will decrease so property sales in the project are likely to slow down.

“Falling consumer confidence will restrain new sales in the Meikarta project, while uncertainty over the completion of the sold units can delay or reduce cash flow from consumers who have already made the sale and purchase agreement,” said Moody’s Deputy President and Senior Analyst Jacintha Poh in a report, Thursday (18/10).

On 19 September 2018, Moody's Investors Service had downgraded Lippo Karawaci’s rating to B3 from B2, the lowest level of highly speculative grade with a high credit risk profile. The rating downgrade was carried out following the rating agency’s previous warning about Lippo’s operations and liquidity performance. Not surprisingly, Moody’s also gave a negative outlook for LPKR.

The rating downgrade reflects the rating agency’s projection that Lippo Karawaci’s operating cash flow at the parent company level will experience further weakness in the next 12-18 months. “The company’s ability to settle its debt obligations will depend on its ability to execute sales asset,” said Poh.

(Read: Property Line Financial Problem Drags Lippo Group Business)

Meikarta - Luhut
Meikarta - Luhut ( ANTARA FOTO/Risky Andrianto)

On 25 April 2018, Moody’s downgraded Lippo Karawaci’s credit rating to B2 from B1 with a negative outlook. At the same time, the international rating agency also downgraded the rating of Theta Capital Pte Ltd, a subsidiary of the Lippo Group’s property business wing, to B2 from B1 with a negative outlook.

On 11 April, Moody’s had warned and reviewed the possibility of downgrading Lippo Karawaci’s rating because it turned in its 2017 financial performance late and failed to meet its special reporting obligations with respect to an issuance of a US dollar-denominated loan.

On Monday (8/10), the Indonesia Stock Exchange (IDX) also made a written warning for LPKR and LPCK because they have not submitted the audited 2018 mid-year financial reports.

Moody’s sees LPKR's operating cash flow at the parent company level will continue to be negative within the next 12-18 months. The total consolidated cash flow calculation did not include the cash flows of Siloam International and Lippo Cikarang, but cover inter-company cash flows such as dividends and proceeds from the sale of assets.

Meanwhile, Standard & Poor’s (S&P) Global Ratings said the alleged bribery case raised questions about the company’s internal governance. Moreover, Lippo Karawaci is considered to have a narrow liquidity buffer.

S&P believes the case will have an impact on the progress and cash flow of the Meikarta project, leading to further pressure on the company’s liquidity.

(Read: Rupiah Depreciation Affecting Four Major Corporations)

“Lippo may need to inject capital if the project cannot be funded independently and requires more capital,” as quoted from the S&P report on Thursday.

Lippo asset sales will provide temporary additional liquidity for the company. However, S&P believes that the company will continue to face liquidity pressure because asset sales are only enough for debt payment over the next year.

Lippo Karawaci is indeed one of the business group pillars established by Mochtar Riady. There are two main business lines in Lippo Group. First, property business driven by Lippo Karawaci with its two major subsidiaries – Lippo Cikarang and Siloam International Hospitals that is engaged in hospital services.

Second, retail business driven by Matahari Putra Prima and Matahari Department Store, which is under the investment holding company, Multipolar.

Moody’s had downgraded the MPPA’s rating to B3 from B2. According to Moody’s Analyst Maisam Hasnain, the downgrade reflects increased liquidity risks and reduced financial flexibility.

With negative income and increased debt, MPPA’s credit profile continued to weaken as it executed a transformation strategy to revitalize operations, including steep price discounts and inventory rationalization. However, potential benefits must still be realized.

MPPA previously planned to perform a rights issue worth Rp 802 billion to support working capital needs. However, Moody’s estimates the corporate action will likely be delayed.

“Without the rights issue, we see that MPPA will rely on debt to finance its operations,” Maisam said. As a consequence, MPPA’s leverage, as measured by adjusted debt for EBITDA, will increase to around 7-8 times by the end of this year. This level cannot support the retail company’s B3 rating.

If the rights issue is delayed, Moody’s also predicts the MPPA’s liquidity will weaken further. This is because cash projections from the company’s operations will likely remain negative until the end of this year.

Even if the rights issue manages to raise Rp 802 billion as planned, MPPA is predicted not to have enough money to finance its operations, the scheduled maturing debts, and capital expenditure.

Based on Katadata’s analysis on the financial reports of the Lippo Group companies, the sales value of the six Lippo Group money machine firms experienced a downward trend over the past five years. LPCK, MLPL and MPPA recorded negative sales growth last year, while LPKR, SILO, and LPPF achieved positive growth but slower than in previous years.

LPKR recorded sales of Rp 10.9 trillion in 2017, rising only 1.4 percent compared to the previous year, even though this property company was able to post a 23.5 percent growth in sales in 2016.

In the retail sector, LPPF also experienced the same conditions. Last year’s sales grew only 1.3 percent, slower than 9.9 percent in the previous year.

Despite still making profits, two Lippo Group property companies – LPKR and LPCK – suffered a decrease in net income compared to the previous year. The LPCK posted a net profit of Rp 366.8 billion in 2017, falling 32 percent compared to the previous year. LPKR's net profit last year was Rp 715.3 billion, down 18.8 percent.

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