Fitch Affirms Bukit Makmur Mandiri Utama at 'BB-'/'A+(idn)'; Outlook Stable

(Fitch Ratings - Jakarta/Singapore - 14 Mar 2024)--Fitch Ratings has affirmed PT Bukit Makmur Mandiri Utama's (BUMA) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' and the rating on BUMA's USD400 million 7.75% notes due 2026 at 'BB-'. At the same time, Fitch Ratings Indonesia has affirmed BUMA's National Long-Term Rating at 'A+(idn)' and the rating on its IDR636 billion bond at 'A+(idn)'. The Outlook is Stable.

The affirmation reflects Fitch's expectation that BUMA's established market position should help mitigate risks associated with its contract expirations in 2025 and help replace lost volumes to some degree through expanded agreements with existing customers or by securing new contracts. BUMA's financial profile should benefit from low capex over the next two to three years, providing a financial buffer ahead of the next expected maintenance capex cycle in 2026, which has some flexibility to be deferred.

BUMA's diversification has improved substantially over the last two years, with a broader counterparty base and the addition of the coal-contracting assets of Australia's Downer EDI Limited (BBB/Negative) in December 2021. BUMA's rating is based on its standalone credit profile, which will be on a par with the credit profile of its parent PT Delta Dunia Makmur Tbk in the absence of ownership of other major operations besides BUMA and no additional debt at BUMA, in line with Fitch's Parent and Subsidiary Linkage Rating Criteria.

'A' National Ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Volumes to Moderate: Fitch expects BUMA Indonesia's 2024 overburden removal volumes to stabilise at 2022 levels of about 435 million bank cubic metres (mbcm), following a 10% increase to 472mbcm in 2023. The 2022 figures reflected a substantial 32% surge from the previous year, largely bolstered by the expansion of contractual agreements with PT Adaro Indonesia (BBB-/Stable) and PT Bayan Resources Tbk.

We believe the additional uptick in 2023 was most likely influenced by elevated coal prices that led many mining companies to increase production, and we expect it to normalise based on our moderating coal price assumptions. We expect the overburden volumes to decline by 4%-8% in 2025-2026, factoring in the volume replacement risk after a key contract expires in 2025.

Volume Replacement Risk: BUMA Indonesia's contract with one of its largest customers, PT Berau Coal Energy, expires in 2025 after the depletion of Berau's reserves. We estimate the contract will account for 43% of its volume in 2024. Even so, we believe BUMA's strong market position, proven record in operations and expertise in managing large, complex mines give it a competitive edge in securing new contracts or expanding existing ones, although risks remain. BUMA also expects some growth in Australian metallurgical coal, which would partially offset the loss of volumes from Berau.

Contract-Linked Capex: BUMA's capex strategy will focus on aligning spends with the life of its long-term contracts, mitigating excess capacity risk over the medium term. We expect its consolidated capex to remain at USD100 million-130 million a year until 2025, relating primarily to maintenance. Fitch's forecast capex of USD225 million in 2026 reflects our expectation of BUMA's equipment replacement cycle and for new contracts to replace 70% of the maturing contracts. Nevertheless, we recognise that BUMA can adjust its capex if there are delays in securing new contracts.

Improving Counterparty Diversification: BUMA's customer diversification has improved significantly in the past two years as it signed new contracts, expanded volumes for some existing customers and acquired Downer's coal-contracting assets in Australia. About half of BUMA's revenue was from Berau until 2021 and this declined to 25% in 9M23 (2022: 30%). The top three customers - Berau, Bayan and Adaro - contributed about 55% of BUMA's revenue in 9M23 (2022: 62%), as the contribution from BUMA Australia remains relatively modest.

We expect BUMA's diversification to improve further, in terms of counterparty and commodity exposure, with the metallurgical coal contract in Australia signed in 2022 and its extension of existing contracts. BUMA Australia contributed about 20% to BUMA's total EBITDA in 9M23, and BUMA's order book now has a 19% contribution from metallurgical coal.

Potential Acquisitions: Fitch expects BUMA to remain opportunistic to inorganic growth to achieve its target of at least 50% non-thermal coal revenue by 2028. It also plans to diversify within the mining sector, building on its expertise to limit execution risks. Consequently, we expect BUMA's business profile to evolve over the medium term, although Fitch considers any such acquisition as an event risk.

Adequate Financial Profile: We forecast BUMA's EBITDA net leverage to be around 2.0x-2.3x during 2023-2026 (2023: 1.7x; 2022: 2.3x). This remains comfortably below our negative rating sensitivity of 3.3x, driven by our expectations of sustained volume level and low capex. We expect rating headroom to be maintained in our rating case, even as we factor in volume declines in 2025 and 2026. We believe the company has sufficient cost and capex flexibility to maintain its financial profile even if volumes decline beyond our expectations.

Bond Tender: We think BUMA's bond refinancing risk has reduced substantially after the company raised USD750 million of bank debt, extending its debt maturity to 2029. The loan would potentially be used to refinance existing debt that includes its outstanding USD365 million bond (due February 2026), finance future acquisitions and fund internal capital requirements.

Derivation Summary

BUMA's rating can be compared with that of Australia-based mining equipment rental company Emeco Holdings Limited (BB-/Stable). We assess BUMA's business profile to be modestly better than that of Emeco due to BUMA's higher revenue visibility and stable operating profile, reflecting its long-term contracts with miners and more diversified service offerings at various production stages.

BUMA still has higher customer concentration risk than Emeco, with around 65% of its revenue coming from four counterparties and more than 80% of its EBITDA exposed to Indonesian thermal coal mining, even though this risk has been declining.

Emeco's revenue visibility has been improving through better diversification, narrowing the gap with BUMA's stronger business profile with over 180 customers across five commodities, and an increase in service-related revenue to 70%. Emeco has a better financial profile than BUMA and its management aims to maintain a conservative balance sheet. We believe this offsets BUMA's slightly stronger business profile, and hence the two are rated at the same level.

BUMA is rated one notch above PT ABM Investama Tbk (B+/Stable) due to its stronger business profile supported by its higher market share, a superior customer base and greater geographic diversification following the acquisition of Downer's coal-contracting assets in Australia.

BUMA, as Indonesia's second-largest mining contractor, has an annual overburden volume that is nearly double that of ABM. BUMA's scale, market position and experience in managing major mining projects is an important consideration in the mining services sector, and we believe BUMA is better than ABM in those aspects. ABM, however, benefits from diversification across business segments, including its coal mining operations and a strong financial profile. Nevertheless, we expect ABM's core contracting business to remain smaller than BUMA's despite its expansion, justifying a one-notch difference in their credit assessments.

Among national peers, BUMA's rating is one notch above the rating of Indonesia's leading industrial and medical gas supplier, PT Samator Indo Gas Tbk (A(idn)/Stable). BUMA's operational scale is significantly larger with EBITDA of USD220 million-260 million compared with Samator Indo Gas's less than USD70 million.

Samator Indo Gas's rating is constrained by its smaller operational scale relative to higher-rated national peers, but counterbalanced by its solid market position and strong EBITDA margin of above than 30%. Fitch expects BUMA to have a better financial profile with stronger coverage and leverage profile in 2023-2026 than Samator Indo Gas.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Indonesia overburden volumes to decline in 2024 to 2022 levels of around 435mbcm, and thereafter decline by 4%-8% per year in 2025 and 2026 as some key contracts mature; overburden volumes from Australia to increase to 180mbcm in 2024 and stabilise at that level thereafter.

- Blended mining rates to decline by 4% in 2024, 2% in 2025 and 2% in 2026. This factors in the decline in coal prices and adjustment for oil prices, in line with Fitch's assumptions.

- Total capex (including Indonesia and Australia) of USD125 million in 2024, USD180 million in 2025 and a rise to USD300 million in 2026 due to the equipment maintenance cycle. These figures include financial leases at 25%-50% of the total capex.

- Dividend of USD30 million for 2024-2026, in line with the last two years.

- For BUMA Australia, EBITDA of USD80 million-85 million through 2024-2026.

RATING SENSITIVITIES

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

An upgrade is unlikely in the near term, as the company's business profile is evolving as it transitions towards a more diversified earnings base. However, a material improvement in BUMA's business diversification beyond coal-related operations, while maintaining an appropriate financial profile, may lead to an upgrade.

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

- Weakening market position, including weak execution of its business strategy, and/or failure to obtain new customers to replace expiring contracts;

- Indications of an overly aggressive approach towards non-thermal coal-related diversification;

- Evidence of weakened external funding access;

- EBITDA net leverage sustained above 3.3x.

Liquidity and Debt Structure

Comfortable Liquidity: BUMA's liquidity remains comfortable, with no significant debt repayment obligations until the maturity of its USD365 million bond in 2026. The bond maturity amount could reduce, as the company has made a tender offer to buy back the bond after it raised a USD750 million bank loan in December 2023, which matures in 2029.

BUMA's cash balance was USD202 million as of September 2023. This does not include proceeds from the recent loan but is sufficient to repay its short-term debt of USD90 million (USD166.5 million including capital leases).

Issuer Profile

BUMA is a subsidiary of PT Delta Dunia Makmur Tbk. It provides coal mining services and carries out mining-related works, such as overburden removal, coal mining, coal hauling, reclamation and land rehabilitation, in Indonesia and Australia. BUMA serves seven customers in Kalimantan, Indonesia, and five customers in Queensland, Australia.

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

BUMA has an ESG Relevance Score of '4' for Greenhouse Gas Emissions and Air Quality, in line with other thermal coal peers, due to its revenue concentration in thermal coal, which faces the risk of declining demand in the medium term because of its high carbon footprint. Funding access for thermal coal companies is tightening progressively, which has a negative impact on BUMA's credit profile and is relevant to the rating in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)