Fitch Affirms Indika Energy at 'A+(idn)'; Outlook Stable

(Fitch Ratings - Jakarta - 18 Apr 2024)--Fitch Ratings Indonesia has affirmed PT Indika Energy Tbk's (Indika) National Long-Term Rating at 'A+(idn)'. The Outlook is Stable.

This affirmation reflects Fitch's expectation that Indika's financial profile will remain adequate over the rating horizon of 2024-2027 despite lower coal price assumptions, increased diversification spending, and a conservative estimate of earnings (EBITDA) from new projects starting in 2026. A recent USD300 million loan signed in December 2023 and stable cash flow from coal operations position Indika well to manage liquidity in the next 12-18 months. A proposed bond issuance, if successful, will also enhance financial flexibility.

We view Indika's execution of its diversification strategy as prudent and largely on track. Its target of generating 50% of revenue from non-coal sources is more likely be achieved closer to 2028, based on management's coal price assumptions and Fitch's expectations on some modest delays in earnings contribution, mainly from the Awak Mas gold mine.

'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

Temporary EBITDA Dip: Fitch forecasts a temporary decline in Indika's EBITDA to USD270 million-300 million in 2024-2025 (2023: USD330 million), mainly because we assume falling coal prices despite sustained production levels of 30 million-31 million tonnes (MT). However, we believe Indika can manage operating costs effectively in a lower coal price environment. The recent adjustments to royalty calculations should reduce main coal mining subsidiary Kideco's cash costs, which increased in 2023 due to a new royalty regime and some lags in applicable coal prices when calculating royalties.

Kideco Remains Key: Kideco remains the cornerstone of the company's credit profile over the medium term. We expect Kideco to generate the majority of the group's cash flow for the next two years, contributing roughly 90% of EBITDA in 2024 and declining to 80% in 2025. This dominance will gradually reduce to 60% by 2026, under our coal price assumptions, as Indika's diversification efforts gain traction. Kideco has a long track record of stable production volumes, effective cost management, and the proven ability to maintain profitability through commodity cycles.

Measured Diversification Strategy: Indika's business profile will evolve over the next two to three years as it works to diversify its revenue base beyond thermal coal. We expect Indika manage its greenfield investments effectively, with a prudent and measured approach. Indika has demonstrated a preference for forming alliances with strategic investors who bring expertise in relevant sectors, particularly when navigating entry into nascent industries. The company forecasts it will allocate about USD620 million towards new ventures in the next four years.

Earnings Contribution from New Projects: Fitch expects EBITDA to recover from 2026, driven by contributions from new businesses, particularly the Awak Mas gold project. We conservatively estimate Indika's new projects to generate USD158 million and USD195 million in EBITDA net of losses from its other ventures in 2026 and 2027, respectively. Management expects Awak Mas's cost position to be competitive (in the third quartile), supporting cash flows.

Adequate Financial Profile: We project Indika's net leverage to remain at 1.7x-1.8x over 2024-2025 (2023: 1.6x), within Fitch's negative sensitivity of 2.5x, due to robust earnings from its coal-mining activities and management's prudent investment approach. While we have raised our net leverage forecasts due to the divestment of PT Multi Tambangjaya Utama and changes to Kideco's cost assumptions in light of 2023 performance, we maintain our expectation that management's will effectively rein in operating costs during lower coal price environments.

Derivation Summary

Indika's closest peer is PT Golden Energy Mines Tbk (GEMS, A+(idn)/Stable). We think both companies have competitive cost positions with demonstrated ability to manage costs in line with coal price movements and adequate reserve life for key mines. GEMS' moderately larger scale, with plans to expand production levels further, offsets Indika's stable and well-established operations with a much longer record.

Indika's diversification beyond thermal coal should help it mitigate challenges arising from tightening funding access for thermal coal companies amid increasing environmental, social and governance considerations. However, we think this difference is offset by GEMS' more conservative financial profile, with a net cash position and limited dependence on external funding. This justifies the same ratings for both peers.

Key Assumptions

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

- Kideco's average coal selling prices in line with Fitch's coal price deck as follows for the Newcastle 6000 index: USD100/tonne in 2024, USD90/tonne in 2025, USD80/tonne in 2026 and USD75/tonne in 2027.

- Kideco's coal mining volume to be 29MT in 2024 (2023: 31MT), and then remain at 30MT thereafter in line with management guidance.

- Kideco's cash production costs (excluding royalty) of around USD27/tonne to USD30/tonne and an EBITDA per tonne of USD7-8.5 per tonne.

- New investment spending of USD304 million in 2024, USD184 million in 2025, USD80 million in 2026 and USD54 million in 2027;

- EBITDA from new investments at USD20 million in 2024, USD54 million in 2025, USD158 million in 2026 and USD195 million in 2027. Our EBITDA assumptions are 20%-30% lower than management guidance.

- Capex for existing operations of USD15 million-20 million a year.

RATING SENSITIVITIES

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

- Fitch does not expect an upgrade in the foreseeable future, as the company's business profile is still evolving as it transitions towards a more diversified earnings base;

- An upgrade may be considered if Indika demonstrates a record of successful execution of non-coal investments, resulting in improvement of the overall business profile while maintaining a prudent financial structure.

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

- Net debt/EBITDA of above 2.5x;

- Material increase in the execution risk for the company's strategy to diversify into non-coal businesses

- Evidence of weakened external funding access.

Liquidity and Debt Structure

Adequate Liquidity: Indika's cash balance of USD583 million at end-2023 and its recent syndicated term loan of USD300 million provide comfortable liquidity against short-term debt of USD421 million, which includes the bonds maturing in November 2024.

The company has only one other bond maturing in October 2025 with outstanding amount of USD529 million. Fitch expects Indika's existing cash balance and its operating cash flow over the next year to be adequate to repay the bond. However, issuance of the new proposed bond would further support Indika's liquidity position and extend the debt maturity profile.

Issuer Profile

Indika is an Indonesia-based conglomerate, whose main asset is Indonesia's fifth-largest thermal coal mine, Kideco, in which it owns a 91% stake. Indika also has direct and indirect ownership of 100% in Awak Mas (gold mine), 100% in EMI (electric vehicles), 100% in Interport (port terminal), 51% in EMITS (roof-top solar), 46% in Natura (essential oil) and 100% in Mekko (bauxite mine). (ends)