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

(Fitch Ratings - Singapore/Jakarta - 29 Mar 2023)--Fitch Ratings has affirmed PT Bukit Makmur Mandiri Utama's (BUMA) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. Fitch has also affirmed the rating on BUMA's USD400 million 7.75% notes due 2026 at 'BB-'.

The affirmation reflects Fitch's expectations of BUMA maintaining stable overburden removal volumes over the next two years, and thereafter being able to replace most of the volume lost after a contract matures in 2025. We also expect BUMA's financial profile to benefit from low capex over the next two to three years, building a cushion for the next maintenance capex cycle, expected in 2025-2026.

The ratings also reflect BUMA's strong position as Indonesia's second-largest mining contractor with a 15% market share. BUMA's geographical and commodity diversification has improved after its acquisition of the coal-contracting assets of Australia's Downer EDI Limited (BBB/Negative) in December 2021, and we expect a further improvement from its metallurgical coal contracts.

Key Rating Drivers

Overburden Removal Volumes Recover: We expect BUMA Indonesia's annual overburden removal volumes to remain at about 425-430 million bank cubic metre (mbcm) in 2023-2024, and then to decline by about 5% in 2025 and 2026, factoring in some volume replacement risk after a key contract expires in 2025. BUMA's overburden volumes increased by 32% in 2022 to 430mbcm (2021: 326mbcm), led by volume growth from PT Adaro Indonesia's (BBB-/Stable) PT Bayan Resources. We also forecast BUMA Australia's volumes to grow to 160mbcm (FY22: 116mbcm) in 2023 as it ramps up production.

Lower Capex: Fitch expects BUMA's consolidated capex to remain limited to maintenance spending of USD125-135 million per year until 2025, supporting improvements in leverage. BUMA's 2022 capex fell to USD148 million (2021: USD340 million) despite some spillover from 2021. The high capex in 2021 was mainly to expand its capacity to support volume growth from its customers, and should remain sufficient to support production until 2025 without any major growth capex.

BUMA's capex is cyclical due to the nature of its business, escalating every 4-5 years for equipment replacements. It expects its next equipment-replacement cycle to be in 2026, but the amount will depend on the volumes from the contracts on hand at that point.

Improving Diversification: BUMA's customer diversification has improved over the last 18 months, as it signed new contracts, expanded volumes for certain existing customers and acquired Downer's coal-contracting assets in Australia. We expect BUMA's diversification to improve further, in terms of counterparty and commodity exposure, after it signed a new metallurgical coal contract in Australia in 2022 while extending existing contracts. BUMA Australia contributed about 15% to BUMA's total EBITDA in 2022, and BUMA's order book now has a 18% contribution from metallurgical coal.

About half of BUMA's revenue was from Berau until 2021, which was reduced to 30% in 2022. The top three customers - Berau, Bayan and Adaro - contribute about 62% of BUMA's revenue (2021: 73%), as the contribution from BUMA Australia remains relatively modest. Nevertheless, we believe BUMA's long relationships with key customers and high contract-renewal rates mitigate the risk associated with customer concentration. Coal miners generally prioritise payments to mining contractors to ensure continuity of operations.

Volume Replacement Risk: BUMA Indonesia's contract with its largest customer PT Berau Coal Energy, which we estimate accounted for 44% of its volume in 2024, is expiring in 2025 following the depletion of reserves. We believe BUMA's strong market position, proven record in operations, and expertise in managing large and complex mines give it a competitive edge in securing new contracts or expanding existing ones, although risks remain. In addition, BUMA expects significant growth potential in Australian metallurgical coal, which can partially offset loss of volumes from the Berau contract.

Evolving Business Profile: We expect BUMA's business profile to evolve over the medium term as the company works towards further increasing its earnings from non-thermal coal via both organic and inorganic means. Its strategy to diversify beyond thermal coal should help mitigate the challenges arising from tightening funding access for thermal coal players from increasing ESG considerations. BUMA plans to diversify within the mining sector as well, building on its current expertise to limit execution risks.

Comfortable Rating Headroom: We forecast BUMA's EBITDA net leverage to be around 2.0x-2.3x during 2023-2026, remaining comfortably below our negative rating sensitivity of 3.3x, driven by improved volumes and low capex. In our rating case, we expect rating headroom to be maintained even as we factor in volume decline 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.

Derivation Summary

BUMA's rating can be compared with 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 from 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. However, BUMA has higher customer concentration risk, with around 70% of its revenue coming from four counterparties and more than 80% of EBITDA exposed to Indonesian thermal coal mining.

In comparison, Emeco's revenue visibility has been improving through better diversification, with over 180 customers across five commodities, and an increase in service-related revenue to 70%, narrowing the gap with BUMA's stronger business profile. 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 they 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 almost twice that of ABM. Scale is an important consideration in this industry, as larger coal miners typically have a better ability to sustain operations through market downturns. ABM, however, benefits from diversification across business segments, including its coal mining operations and a strong financial profile. Nevertheless, we expect its core contracting business to remain smaller than BUMA's despite its expansion, justifying a one-notch difference in its credit assessment.

Key Assumptions

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

- Indonesia volumes to remain almost flat in 2023 and 2024, and thereafter decline by about 5%-6% per year in 2025 and 2026 as some key contracts mature. Overburden volumes from Australia to increase to 160mbcm in 2023 and thereafter increase to 180mbcm from 2024.

- Blended mining rates to remain flat in 2023, then decline by 5% 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 both Indonesia and Australia) of USD135 million in 2023, USD125 million in 2024, USD 160 million in 2025 and a rise to USD275 million in 2026 due to the expected equipment maintenance cycle. These figures include financial leases, which we expect to be 25%-50% for Indonesia.

- Dividend of USD15 million for 2023-2026, in line with management guidance.

- For BUMA Australia, EBITDA of USD70 million-75 million through 2023-2026.

RATING SENSITIVITIES

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

- An upgrade is unlikely over the near term because the company's business profile is evolving as it transitions towards a more diversified earnings base. That said, a material improvement in BUMA's business diversification beyond thermal 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:

- Any material weakening in BUMA's market position, including weak execution of its business strategy, and failure to obtain new customers to replace expiring contracts;

- Tightening of funding access caused by weak implementation of its diversification strategy;

- EBITDA net leverage sustained above 3.3x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Comfortable liquidity: BUMA's liquidity remains comfortable over the next two years with no major refinancing requirements, driven by its back-ended debt maturity profile. We expect its internal cash flow to be sufficient to repay the senior secured loan, which has a step-up amortising repayment structure and minimal repayment requirements till 2024.

BUMA's next major refinancing requirement is in 2026 when its USD400 million notes, along with the remaining USD125 million of secured loans, are due. We believe BUMA would require replacement of the earnings stream from contracts that end in or around 2025 with new contracts or other acquisitions to fulfil its medium-term refinancing requirements.

Issuer Profile

BUMA is a subsidiary of PT Delta Dunia Makmur Tbk. It provides coal mining services and carries out mining-related works, such 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's ESG Relevance score for Greenhouse Gas Emissions and Air Quality was changed to '4' from '3' due to BUMA's 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 has progressively tightened, which has a negative impact on BUMA's credit profile and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)