Fitch Affirms ABM Investama at 'B+'; Outlook Negative

(Fitch Ratings - Singapore - 08 May 2020) -- Fitch Ratings has affirmed PT ABM Investama Tbk's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. The Outlook is Negative. The agency has also affirmed the rating on ABM's US-dollar senior notes at 'B+' with a Recovery Rating of 'RR4'.

The affirmation reflects a better improvement than Fitch expected in ABM's contracting business, which will somewhat counteract our anticipated deterioration in the group's mining business. ABM signed new coal mining contracts over the previous year that will make up for loss in volume due to the cancelation of agreements with its key customer - PT Toba Bara Sejahtra Tbk - in 1Q19.

The Negative Outlook reflects our expectations that the company's credit metrics will weaken because of its coal mining business, in line with our downward revision of the coal price and volume assumptions. We lowered the selling price of ABM's thermal coal for 2020 following the revision of our commodity-price assumptions; see Fitch Ratings Updates Mid-Cycle Metals and Mining Price Assumptions at www.fitchratings.com/site/pr/10114944. We expect the company's coal sales volume to decline by 16% yoy in 2020 due to weaker demand amid the coronavirus pandemic, before picking up to 2019 levels in 2021. There is also a degree of operational risk associated with PT Cipta Kridatama (CK), ABM's mining services subsidiary, maintaining profitability at its newly contracted sites.

ABM continues to struggle to find a suitable acquisition target to replenish its falling reserves at its key mine, PT Tunas Indi Abadi (TIA). Fitch does not expect an acquisition to be likely within the next two to three years, adding to ABM's weakening business profile. This has lead Fitch to tighten its financial triggers for negative rating action to FFO adjusted net leverage of above 3.0x for a sustained period, from more than 4.0x.

KEY RATING DRIVERS

Recovering Mining Contracting Business: CK has signed new contracts over last year, making up for most of the volume lost after the cancellation of ABM's three key contracts by its top customer, Toba Bara, in 1Q19. CK's quick turnaround was supported by its spare capacity, which includes its young fleet and quality Caterpillar equipment sourced through an affiliated company. Fitch expects volume to increase to 118 million billion cubic metres (bcm) in 2020, against management's estimates of about 150 million bcm, as we have factored in our assessment of the pandemic's impact on CK's mining plans. Toba Bara accounted for 60 million bcm of ABM's overhead removal volume in 2018.

Reduced Strategy, Execution Risk: We have revised ABM's ESG relevance score of 4 for management strategy back to 3. The revision follows CK demonstrating its ability to recoup the volume it lost due to Toba Bara. ABM used external consulting services over last few years to improve its operational efficiency across its mining contracting and coal-mining businesses. There is a degree of operational risk associated with CK maintaining profitability at its newly contracted sites, but not significant enough to directly damage its credit profile, in our view.

Coal Mining Operation to Deteriorate: Fitch lowered selling price assumption for ABM's thermal coal in line with the agency's revision of its commodity-price assumptions. We also expect ABM's coal sales volume to contract by 16% due to weaker demand and the possibility of lower production quotas in 2020. Fitch no longer expects ABM to acquire a mid-range calorific value (CV) mine to replenish its depleting coal reserves at its key TIA mine in the medium term; TIA produces coal with a CV of 4,200kcal/kg and has only three years of reserve life left. ABM's second mine, PT MIFA Bersaudara, has higher reserves, at about 220 million tonnes, although the mine produces lower CV coal of 3,100-3,400kcal/kg, resulting in lower profit.

Integrated Business Model: ABM benefits from its integrated operation, with a presence across the energy value chain. A presence across mining contracting, low-cost coal mining, logistics, engineering services and fuel services enables ABM to drive synergies and offer services across the value chain to customers. The company also benefits from its relationships with affiliated companies, including PT Trakindo Utama, a long-term distributor of Caterpillar, which provides most of the equipment and spare parts for ABM's mining contracting business. Trakindo is also an important customer for ABM's logistics and engineering services.

Financial Profile to Weaken: Fitch expects ABM's financial profile to weaken due to a deterioration in its mining operation. Fitch expects ABM's FFO adjusted net leverage to remain at around 4.3x in 2020, before improving to less than 3.0x from 2021. ABM acquired a minority stake in another coal mining company in 2019 for USD60 million. The acquisition supported the company's contracting business volume, but reduced its cash balance. Nevertheless, we expect ABM's free cash flow before acquisitions to remain positive from 2021 in light of our moderate capex expectations.

Exposure to Cyclical Coal Industry: ABM is vulnerable to the commodity cycle, as around 80% of its EBITDA and cash flow is derived from the coal industry. This risk is mitigated by its low-cost position as a coal producer and its integrated business model.

DERIVATION SUMMARY

ABM's closest peer is PT Bukit Makmur Mandiri Utama (BUMA, BB-/Negative). ABM benefits from diversification across various business segments and its stronger financial profile; however, its core contracting business is weaker than BUMA's, justifying a notch of difference in its credit assessment, in our view. BUMA enjoys a stronger market share, with better efficiency and hence operating margins. BUMA ranks as Indonesia's second-largest mining contractor, while we expect ABM's position to drop from being the fourth-largest mining contract after losing its key customer.

Within coal mining peers, ABM can be compared with PT Golden Energy Mines Tbk (B+/Stable), which is assessed based on the consolidated credit profile of Golden Energy and Resources Limited (GEAR, B+/Stable). Compared with ABM, GEAR has a longer reserve life and lower cost position. On the other hand, ABM benefits from its portfolio of diversified businesses. However, ABM's further weakening financial profile justifies the Negative Outlook at the same rating level. (ends)