Fitch Affirms Pengembang Pelabuhan Indonesia at 'AAA(idn)'; Outlook Stable

(Fitch Ratings - Hong Kong - 19 Aug 2020)--Fitch Ratings Indonesia has affirmed PT Pengembang Pelabuhan Indonesia's (PPI) National Long-Term Rating of 'AAA(idn)'. The Outlook is Stable.

'AAA(idn)' National Ratings denote the highest rating assigned by the agency in our National Rating scale for Indonesia. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

RATING RATIONALE

The affirmation reflects the strong linkage between PPI and its parent, state-owned port operator, PT Pelabuhan Indonesia II (Persero) (Pelindo II, BBB/Stable) and its position as part of a primary port of call within its served region as well as the protective contractual agreement on PPI's long-term lease business model. These factors are also reflected in PPI's Standalone Credit Profile (SCP) of 'aa+(idn)', despite the terminal operator's limited operational record and capex plan for greenfield projects.

Fitch assesses the strong linkages under its Parent and Subsidiary Rating Linkage criteria based on Pelindo II's 100% stake in PPI, the strong operational relationship between Pelindo II and PPI, and their strong legal linkages, as reflected by a cross-default clause under Pelindo II's bond document. PPI is one of Pelindo II's material subsidiaries, as the company's revenue and assets amount to 6% and 5%, respectively, of the parent's total consolidated revenue. Fitch assessment of PPI's creditworthiness is equalised with Pelindo II's credit profile.

PPI's business model also benefits from the contractual arrangement with PT New Priok Container Terminal One (NPCT1) as the port operator and Pelindo II, which is the concession owner. The related payment structure insulates PPI from price volatility and demand shocks, including from the measures taken to contain the spread of the coronavirus pandemic.

PPI does not face near-term refinancing risk because its debt is fully amortising. It is also unaffected by interest-rate or currency volatility, as all its debt carries fixed interest rates and is denominated in Indonesian rupiah. The conditions for PPI's debt issued in January 2020 do not call for payment of principal until the third year, so there is no immediate pressure on PPI's cash flow to service the debt. Fitch does not expect PPI's debt servicing ability to be impaired by the pandemic.

The pandemic and related government containment measures worldwide create an uncertain global environment for the seaport sector. PPI's most recently available data may not indicate impaired performance, but changes in revenue and costs are occurring across the seaport sector and will continue to evolve along with economic activity and government restrictions. Our ratings are forward-looking in nature and we will monitor sector developments and how they are affected by the pandemic's severity and duration. Our expectations for performance and assessment of key risks will be incorporated into the qualitative and quantitative inputs for our revised base and rating cases.

KEY RATING DRIVERS

Part of Primary Port, No Volume Risk Exposure: Revenue Risk (Volume) - Stronger

PPI's Container Terminal 1 is part of Tanjung Priok, the primary port of call for Jakarta and West Java that is operated by Pelindo II, which has a dominant container market share with limited competition and mainly origin and destination business with little trans-shipment cargo. The port accounts for about 40% of container throughput in Indonesia. PPI benefits from a 25-year fixed contractual-income arrangement with NPCT1, which operates the terminal. This allows PPI to avoid volume fluctuation. The terminal relies on Pelindo II's port infrastructure. Land access to Pelindo II's ports is largely through roads with limited rail connections, although it is constructing an inland waterway and developing a 34km three-lane toll road with partners to connect Tanjung Priok with its hinterland to ease traffic congestion near the port. NPCT1's 16 metre draft can handle vessels of 12,000 twenty-foot equivalent units and Tanjung Priok is positioned as Indonesia's trans-shipment hub.

Stable Rental Income: Revenue Risk (Price) - Stronger

PPI's long-term lease business model features the protective contractual arrangement with NPCT1 as the operator and Pelindo II as the concession owner. PPI benefits from fixed rental income from NPCT1 and fixed rental payments to Pelindo II. Tariffs are reviewed with NPCT1 every five years, with a 1% limit on changes linked to the operator's performance, giving PPI flexibility over rates. This also enables PPI to minimise volatility in its operation, leading to stable cash flow that comprises 100% of the contracted payments.

Elevated Capital Expenditure Plan: Infrastructure Development and Renewal - Midrange

Fitch forecasts elevated capital expenditure in the next five years, at IDR2.1 trillion, comprising an investment in non-controlled toll-road projects, including a rest area and logistic centre (73%) and property projects (27%). All are greenfield projects and realisation will rely on construction progress. Fitch expects a slowdown in construction activity resulting in lower capex than the company plans.

PPI forms joint ventures with partners that have experience and expertise in its major investments, such as Cibitung-Cilincing toll road, rest area and logistic centre as well as a maritime tower. The property projects will be built on Pelindo II's land, allowing PPI to avoid land acquisition risk on this segment. Meanwhile, toll-road assets are listed as strategic projects in a presidential decree; PPIs planned toll-road investments account for around 62% of its total capex. Most of its capex plan may be exposed to cost overruns and construction risk, but is partially mitigated by the joint ventures. We expect most of the capex to be debt-funded, which will pressure PPI's Standalone Credit Profile.

Fixed and Fully Amortised Debt: Debt Structure - Midrange

PPI does not have debt outstanding. However, the company has obtained a syndicated loan of IDR 1 trillion, the majority of which will be used to finance its toll-road investment. The debt structure is typical of a corporate borrower, utilising amortising debt with few protective covenants that would be found in a project finance-type structure. PPI has minimal refinancing risk, since the debt is fully amortised. Its debt has a fixed interest rate, which mitigates interest fluctuation risk. PPI is exposed to foreign-currency risk, as all its revenue is in US dollars while the majority of its expenses, including capex requirements, are in Indonesian rupiah.

Financial Profile

Fitch forecasts PPI's leverage, as measured by adjusted net debt/EBITDAR, to peak in 2021 following the completion of its property projects and toll roads. Fitch's base and rating cases forecast 2021 leverage at 3.4x and 4.5x, respectively, followed by a significant deleveraging to 2.1x and 3.1x in 2024. The base case forecasts a five-year average of 2.6x, while the rating case has a five-year average of 3.5x.

PEER GROUP

PPI's closest domestic peers on the national rating scale are PT Angkasa Pura I (Persero) (AP I, AA+(idn)/Negative, SCP: aa-(idn)), PT Profesional Telekomunikasi Indonesia (Protelindo; AAA(idn)/Stable) and PT Mayora Indah Tbk (AA(idn)/Stable).

AP I is a state-owned airport operator focusing on the central and eastern parts of Indonesia. It has higher leverage than PPI due to its aggressive capex plan for airport expansion. AP I has exposure to volume risk, volatility in traffic demand and price risk, as tariff flexibility is subject to government approval. Meanwhile, PPI benefits from fixed rental income and expenses, which limit its operational risk. This justifies a SCP that is two notches higher than that of AP I.

Protelindo has a similar business profile to PPI, as their incomes are largely secured by long-term contracts. However, Protelindo is one of the country's largest independent tower operators with a diverse client base of which 67%-70% comprise investment-grade clients. Meanwhile, PPI benefits from limited operational risk with a single client, an internationally renowned port operator controlled by its parent, Pelindo II. Fitch therefore believes PPI warrants a SCP one notch below Protelindo's rating.

PPI has a better business risk profile than Mayora, as it benefits from long-term contract revenue, resulting in stable cash flow and limited operational risk. Mayora's cash generation is exposed to the cyclicality of commodity prices. However, PPI has higher leverage, although the execution of its capex is supported by the long operating experience of its parent and joint venture partners. Fitch thinks this justifies PPI having a SCP that is one-notch higher than Mayora's rating.

RATING SENSITIVITIES

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

We think positive rating action is not probable in the near-term given the company's elevated capex and investment plans.

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

Weakening of linkages with the parent, Pelindo II

A downgrade of Pelindo II's rating would be reflected in PPI's National Long-Term Rating.

An increase in projected Fitch-adjusted net debt/EBITDAR to greater than 6.0x for a sustained period in the Fitch rating case may result in a lower SCP, but may not directly affect PPI's National Long-Term Rating, which is equalised with that of its parent.

CREDIT UPDATE

PPI's revenue dropped by 10% to IDR772 billion in 2019 due to lower quarterly site rent income following a delay in the delivery of 57 metres of land area. However, this was offset by a cut in rental expenses to Pelindo II to about IDR236 billion, increasing PPI's net profit by 111% to IDR241 billion. Capex disbursement was less than planned due to a delay in PPI's toll road construction and a change in the property business plan. PPI did not have debt outstanding as of end-2019.

FINANCIAL ANALYSIS

Fitch's base case assumes fixed quarterly site rent income with expected tariff hikes in 2022, additional advance site rent payments of USD23.5 million in 2021 and USD6.5 million in 2023, project-management income from two developments, property construction expenses and property income starting from 2021. We also include management guidance on capex for property and investment in the toll-road asset. Leverage, as measured by adjusted net debt/EBITDAR, will rise to a five-year average of 2.6x and a maximum of 3.4x in 2021 under our base case.

Our rating case is more conservative and incorporates a number of stresses, including a one-year delay on the quarterly site rent tariff increment and advance site rent payment, a 10% haircut on project management and property income, 10% operating expense stress for all segments and 10% capex stress. The rating case results in a dramatic increase in leverage to a five-year average of 3.5x and a maximum of 4.5x during 2020-2024. (ends)