Fitch Affirms Pupuk Indonesia at 'AAA(idn)' with Stable Outlook; Withdraws Ratings

(Fitch Ratings - Jakarta - 17 Jan 2024)--Fitch Ratings Indonesia has affirmed PT Pupuk Indonesia (Persero)'s (PTPI) National Long-Term Rating and the rating on its outstanding rupiah-denominated bonds at 'AAA(idn)'. The Outlook for the National Long-Term Rating is Stable. At the same time, Fitch has withdrawn all the ratings.

PTPI's rating is equalised with that of its ultimate parent, the Indonesian sovereign (BBB/Stable). The equalisation is driven by Fitch's expectation that the Indonesian government has 'Very Strong' responsibility to support the company. The state also has incentive to support based on PTPI's 'Very Strong' preservation of government policy role and 'Strong' contagion risk. This is due to the company's strategic role as the government's sole agent in producing and distributing subsidised fertilisers to eligible farmers through a public-service obligation (PSO) scheme.

Fitch assesses PTPI's Standalone Credit Profile (SCP) at 'aa-(idn)', which benefits from its leading position in the domestic fertiliser market. The SCP reflects our expectation the EBITDA margin will normalise to 13%-14% (2022: 29%) as production costs increase. We expect PTPI's significant capex programme to lead to higher EBITDA net leverage of 1.0x-2.0x in 2024-2025.

'AAA' National Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. 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 or monetary union.

Fitch has chosen to withdraw the ratings on PTPI for commercial reasons.

Key Rating Drivers

'Very Strong' Preservation of Government Policy Role: We believe PTPI's PSO to produce and distribute subsidised fertilisers plays an important role in supporting the nation's food security. The company's wide distribution network across Indonesia and sizeable production capacity mean no effective substitute is available if a default occurs. PTPI's failure as a PSO agent would also carry significant political implications, given the importance of the fertiliser subsidy to national food security.

'Strong' Contagion Risk: We assess PTPI's contagion risk as 'Strong' as a default is likely to disrupt access to financing for the government or other government-related entities (GREs). PTPI has extensive access to bank funding with total borrowings reaching IDR30.1 trillion by end-September 2023. As a PSO agent and direct subsidy recipient, a financial default by PTPI would undermine investors' confidence in the state's ability to support other GREs.

'Very Strong' Decision-Making and Oversight: PTPI is 100% owned by the state, which has strong influence over its strategic and operational decisions. All of PTPI's board members are appointed by the state through the Ministry of State-Owned Enterprise. The government, through the Ministry of Agriculture, has tight control over the pricing, volume and profit margin of PTPI's subsidised fertiliser segment, which contributed 57% of PTPI's total revenue in 9M23.

'Very Strong' Precedents of Support: PTPI receives a subsidy from the government for producing and distributing fertiliser. The allocated fertiliser subsidy in the 2024 state budget plan amounts to IDR26.7 trillion (2023: IDR25.3 trillion), or 28% of the non-energy subsidy allocation for the year. The state also supports PTPI in terms of cost control to ensure the sustainability of the company's operations through a cap on natural gas prices for the fertiliser industry. We believe this support will continue as food security remains a priority for the government.

Solid Market Position: PTPI is the eighth-largest fertiliser maker globally in terms of revenue, in addition to its leadership domestically. It had a domestic market share of 99% for urea, 41% for NPK, and 82% for ammonia in 2022. The company sold around 8 million tonnes of fertiliser and 1 million tonnes of non-fertiliser products in 9M23. We believe PTPI will continue to maintain its position as the largest fertiliser company in the country given its expansion plan and the absence of large competitors.

Normalised Profitability: We forecast PTPI's EBITDA margin will return to around 13% in 2023 (2022: 29.4%) and remain stable at around 14% in 2024-2025. Our expectation of stable profitability will be driven by lower average selling prices after high global fertiliser prices in 2022. The stable EBITDA margin will also be a result of the government's gas price cap for the fertiliser industry. This constitutes a major component of PTPI's cost, accounting for around 60%-70% of its cost of goods sold.

Higher Leverage on Capacity Expansion: PTPI's free cash flow will be negative in 2024-2026, following Fitch's estimate of around IDR15 trillion in investment capex per year. This will translate into higher EBITDA net leverage of 1.0-2.0x in 2024-2025 (2022: net cash), as we assume capex will mostly be funded by debt. PTPI's financial profile is also dependent on the amount and timing of subsidy payments from the government. Payment delays that result in a subsidy receivable build-up may also result in larger working-capital requirements and debt.

Derivation Summary

Fitch's equalisation of PTPI's ratings with that of the Indonesian government results from our assessment of the 'Very Strong' scores for its decision-making and oversight, precedent of support and preservation of government policy role, and a 'Strong' score for the contagion risk factor.

Key Assumptions

- PSO scheme unchanged, with PTPI continuing to receive direct subsidies from the state to compensate for any cost gap plus a predetermined margin for its subsidised fertiliser sales. Stable subsidised fertiliser average selling price (excluding direct subsidies) in the medium term.

- Non-subsidised urea price guidance according to Fitch's price deck (updated as of December 2023).

- EBITDA margin of 13.2% in 2023 (2022: 29.4%) and stable at around 14.0% in 2024-2026 on higher raw-material prices.

- Capex of around IDR4 trillion in 2023 (2022: IDR4.4 trillion). Capex to rise to above IDR15 trillion per year in 2024-2026 to support expansion and new projects.

- Any cash shortfall to be covered by external debt.

- Dividend payout of 25%-35% in 2023-2026.

RATING SENSITIVITIES

No longer relevant as the ratings are being withdrawn.

Liquidity and Debt Structure

Adequate Liquidity; Solid Funding Access: PTPI's cash balance stood at IDR19.2 trillion as of end-September 2023, which remains adequate to cover the higher debt amortisation in 2024. The debt matures in 2024, including PTPI's current portion of long-term debt of around IDR5.3 trillion in 2024 and two mature bonds amounting to IDR2.4 trillion.

PTPI also has short-term debt of around IDR14.8 trillion as of end-September 2023, which we believe will be rolled over for working-capital purposes. We believe PTPI's funding access is solid given its status as one of the state's key subsidiaries. Moreover, PTPI has extensive relationships with its existing lenders, comprising several local and foreign banks.

Issuer Profile

PTPI is a state-owned company that acts as the state's sole agent to produce and distribute fertiliser to eligible farmers through the PSO scheme. It also sells non-subsidised products in domestic and export markets. (ends)