Fitch Affirms Bukit Makmur Mandiri Utama at 'BB-'; Outlook Stable

(Fitch Ratings-Singapore-25 September 2019)-- Fitch Ratings has affirmed Indonesia-based PT Bukit Makmur Mandiri Utama's (BUMA) Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. The agency has also affirmed the rating of BUMA's USD350 million 7.75% senior notes at 'BB-'.

BUMA's rating reflects its leading position as the second-largest mining contractor in Indonesia with a market share of about 15% and a record of winning and renewing contracts. BUMA's performance, in terms of volume growth and margins, has been in line with our expectations over the last few years. The rating also reflects the concentration risk the company faces, with about 80% of its revenue dependent on four counterparties, and the highly cyclical nature of the Indonesian coal contracting-service industry.

KEY RATING DRIVERS

Customer Acquisitions to Slow: Fitch expects BUMA's volume growth to stabilise at about 5%-7% in 2020-2022, mainly driven by a moderate expansion in existing customers as we believe the company's acquisition of new customers will slow. BUMA's volume rose by about 15% in 2018, which was lower than our expectation mainly on account of a slower ramp-up at the sites of new customers such as TAM Coal, Pada Idi and Insani Baraperkasa due to their operational issues. BUMA has trade receivables of about USD40 million from these three customers, which it expects to recover gradually as the issues are resolved.

Pada Idi, which signed a contract with BUMA in 2017, is facing operational as well as land compensation issues and has about USD28 million in trade payables due to BUMA. As part of the recovery process, BUMA is now jointly managing the operations at Pada Idi to enhance efficiency and hence expects a gradual recovery of the receivables over the next two years. We do not expect the new customers' difficulties to have a significant financial impact on BUMA due to their limited revenue and profit contribution; however, we believe management will become more selective of its customers.

Capex to Moderate: We forecast BUMA's capex will remain low at about USD150 million over 2019-2022 as it has replaced a majority of its equipment over the last two years and no significant capacity expansion is expected. BUMA spent about USD570 million in 2016-2018, driven by growth and maintenance capex. We expect capex during its equipment-replacement cycle in 2023-2024 to be lower due to its Certified Machine Rebuild programme, which extends the life for certain equipment at about 70% of the market price. We expect BUMA's FFO net leverage to stay at about 2.7x in 2019 before gradually declining to 2.0x by 2022, comfortably below Fitch's 3.0x negative rating guideline.

Customer Concentration: We expect BUMA's customer concentration to remain high in the near term, with more than 80% of its revenue from four counterparties, including PT Berau Coal's share remaining at about 50%. BUMA has increased its counterparties to eight from four in 2016 in an effort to diversify. However, apart from Geo Energy Resources Limited (B/Negative), which contributes about 10% of BUMA's total revenue, newer customers have not provided a significant diversification benefit to the company amid their various issues.

We believe the risk associated with customer concentration is partly mitigated by high customer switching costs and long transition periods for coal-mining contractors. In addition, BUMA has a strong record of meeting customer expectations, leading to long relationships and high contract renewal rates. Coal miners also generally prioritise their payments to mining contractors to ensure the continuity of their operations.

Strong Market Position: BUMA's key customers, Berau, PT Adaro Indonesia and PT Kideco Jaya Agung, which contributed about 73% of the company's revenue in 2018, have an efficient cost position and about 15 or more years of working with BUMA. About 70% of BUMA's volumes are linked to coal price movements. We expect BUMA's EBITDA margins to remain resilient at about 30%-32% during the next three years following moderate volume growth at its customers. BUMA will continue to benefit from a continuous implementation of its cost-efficiency initiatives with further technological integration and an improving equipment lifecycle.

Strong Management and Shareholders: BUMA benefits from a strong management team with extensive mining-sector experience as well as previous experience working for large, internationally renowned multinationals. BUMA is wholly owned by PT Delta Dunia Makmur Tbk (Delta Dunia), which is 37.9% held by Northstar Tambang Persada Ltd, comprising TPG Capital, Northstar Pacific Partners, GIC Private Limited and China Investment Corporation. The remainder is owned by the public. Delta Dunia is a holding company with no assets other than BUMA and is debt-free.

DERIVATION SUMMARY

BUMA's closest rated peers are PT ABM Investama Tbk (B+/Negative) and Emeco Holdings Limited (B/Stable). BUMA's one-notch differential to ABM's rating is justified by its stronger business profile, driven by its better mine-contracting business in terms of efficiency, with higher EBITDA margins and market share. BUMA is Indonesia's second-largest mining contractor while ABM is the seventh biggest in an industry where scale is important. ABM benefits from its diversified business, although its weakening mining-contractor business is likely to result in the company increasing its reliance on coal sales, which are more volatile. BUMA's financial profile is also stronger than that of ABM.

BUMA has better revenue visibility than Australia-based equipment-rental company Emeco and a relatively stable operating profile that stems from the company's long-term contracts with miners and its integration in the production stage. We expect Emeco's financial profile to improve and become comparable with that of BUMA over the next two years, but BUMA also benefits from the higher cost for coal miners to switch mining contractors, unlike Emeco, underscoring the two-notch differential between the two ratings.

KEY ASSUMPTIONS

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

- Contract pricing charged by BUMA reflects Newcastle coal prices assumptions as per Fitch price deck (USD78/tonne in 2020, USD76/tonne in 2021 and USD75/tonne on a long-term basis). For 2019, we have taken the actual coal price to date and assumed Newcastle coal prices of USD65-75/tonne for the rest of the year.

- Volume growth of about 5%-7% in 2019-2022.

- Average annual capex of USD140 million-160 million over 2019 to 2022 (2018: USD304 million)

- Dividend payout ratio of 30%

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

Fitch does not expect positive rating action in the near term due to BUMA's exposure to the cyclical coal industry, customer concentration and counterparty credit risk. However, developments that may, individually or collectively, lead to positive rating action include:

- FFO adjusted net leverage below 2.0x on a sustained basis

- Reduced customer concentration risk with a higher revenue contribution from a more diverse and stable set of counterparties

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- Weakening of BUMA's market position, including failure to retain major customers, and contract volume and cash flow generation falling short of Fitch's expectations, leading to deteriorating credit metrics

- FFO adjusted net leverage above 3.0x for a sustained period

LIQUIDITY

Adequate Liquidity: BUMA has adequate liquidity in light of its internal cash generation and medium-term debt-maturity profile. Its debt-maturity profile is well spread out apart from the USD350 million bond bullet payment due in 2022. BUMA's cash flow from operations was USD175 million as of end-2018, with a cash balance of USD65 million. This was against debt of about USD90 million maturing in 2019. The company also has revolver facilities for USD50 million, which it can tap if required. We also expect BUMA to benefit from improving cash flow from operations, supported by its stable operations and adequate industry conditions.

BUMA's debt is denominated in US dollars; however, its foreign-exchange risk is naturally hedged by the company's US dollar-denominated cash flow. (ends)