Fitch affirms Indonesia's Indika at 'B+'; outlook positive
Monday, April 8 2013 - 06:53 AM WIB
Positive outlook: Indika's Positive Outlook reflects Fitch's expectation of a sustained improvement in its credit metrics, despite weakened coal prices. The improvement will be driven by rising earnings from its 69.8%-owned mining sub-contractor, Petrosea, and its 51%-owned PT Mitrabahtera Segara Sejati, a logistics service supplier to the coal industry, as well as by low expansionary and acquisition-related expenses.
Weak coal prices: Fitch expects dividends from Indika's 46%-held associate PT Kideco Jaya Agung (Kideco) to fall substantially next year, due to lower profitability in 2013 on account of weak coal prices. Fitch believes that thermal coal prices have bottomed out but are unlikely to materially improve in the next 18 to 24 months. However, Fitch expects Indika's leverage, as measured by adjusted debt net of cash/operating EBITDAR (including dividends from Kideco), to improve from 1.9x in 2012 due to increasing earnings from other sectors.
Exposure to coal industry: Most of Indika's earnings are derived either directly or indirectly from the coal industry, exposing the company to volatile coal prices, weather risks and an evolving regulatory environment. The volume of business of sub-contracted mining and coal barging is vulnerable to a prolonged downswing in the coal industry, although these operations are insulated by the nature of their contracts from coal price fluctuations in the short term.
Integrated business model: Indika's increasing earnings from sub-contracted mining and coal barging help limit the sensitivity of its earnings to commodity price fluctuations. Earnings from these divisions are based mainly on long-term contracts, mostly with fixed prices and fuel-price pass-through mechanisms. Sub-contracted mining and coal barging accounted for more than 50% of Indika's adjusted EBITDAR, including dividends from Kideco in 2012, and Fitch expects these operations to increase their share of earnings in the medium term.
Healthy liquidity: Fitch expects Indika to generate positive annual free cash flow in the medium term, as the agency believes it has mostly completed its expansionary investments. Indika had an estimated USD649m in cash at end-March 2013, compared with current debt maturities of about USD115m. Indika raised USD500m via a 10-year senior unsecured bond issue in January this year, of which USD235m was used to refinance some of its existing debt. The excess proceeds would be used to repay USD230m of its 2016 bonds later this year. (ends)