Fitch Downgrades ABM Investama to B+; Outlook Negative

(Fitch Ratings - Singapore/Jakarta - 17 May 2019)-- Fitch Ratings has downgraded PT ABM Investama Tbk's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B+' from 'BB-'. The Outlook is Negative. The agency has also downgraded the rating on ABM's US dollar senior notes to 'B+' with a Recovery Rating of 'RR4' from 'BB-'.

The downgrade reflects ABM's weakening business profile due to the loss of coal mining contracts with one of its customers - Toba Bara Sejahtra Tbk - in 1Q2019. Toba Bara, which contributed about 20% of ABM's total revenue in 2018, terminated its three contracts with ABM's mining services subsidiary, PT Cipta Kridatama (CK). ABM also struggles to find a suitable acquisition target to replenish its falling reserves at its key mine, PT Tunas Indi Abadi (TIA), which has a reserve life of less than four years. This adds to ABM's weakening business profile. The loss of revenues at CK is also likely to weaken ABM's financial profile.

The Negative Outlook reflects the execution risks associated with the company's plan to substitute the lost revenue and expand the volumes for its coal contracting segment. Fitch believes ABM's credit profile will be in line with a 'B+' rating if the company's plan is successful. Fitch could revise the Outlook to Stable once the company is able to demonstrate it can increase the volumes and profitability of the coal contracting business while maintaining its financial profile.

Key Rating Drivers

Weakened Coal Contracting Business: ABM's coal mining subsidiary CK's operating profile has weakened with the cancellation of three key contracts by its top customer Toba Bara. This is likely to result in lower overburden volumes and thereby lower earnings over the next 12-24 months while CK tries to replace volumes with new contracts. We believe the company could take a few years to regain its market share in terms of volumes, although we expect the spare capacity to be partially used up in 2019 as CK starts work at a new site. Toba Bara had a signed a five-year contract with CK in 2015 and accounted for about 45% of CK's overburden removal volumes in 2018.

ABM did show a modest recovery in its coal mining services in 2018, mainly led by higher volumes at Toba Bara, a reflection of its efforts to improve operational efficiencies in this segment. However, CK's recovery might be further delayed because of the lost revenue. We recognise CK's young fleet and quality Caterpillar equipment sourced through an affiliated company. This can aid its efforts to obtain new customers, in Fitch's view.

Weakening Financial Profile: We expect ABM's financial profile to weaken in light of deterioration in CK's operations. Fitch expects ABM's funds from operations (FFO) adjusted net leverage to remain above 3.0x and its FFO fixed-charge cover to stay below 2.5x. ABM also plans to acquire a minority stake in another coal mining company in 2019 for USD60 million after successfully obtaining consent from its bondholders for waiver of certain covenants. Fitch believes the investment will reduce ABM's cash balance (end-2018: USD157 million) and will require the company to increase its reliance on debt funding for any future acquisitions. Nevertheless, we expect ABM's free cash flow before acquisitions to remain postitve in light of our moderate capex expectations.

Depleting Reserves at Key Mine: ABM plans to improve the profile of its coal mine portfolio by acquiring a majority stake in a mid-range calorific value (CV) mining concession. The company has not been able to find a suitable target, but Fitch believes an aquisition is important to replenish the company's depleting coal reserves at TIA, ABM's key mine. TIA produces coal with a CV of 4,200kcal/kg and has only a four-year reserve life at current production levels. ABM's second mine, PT MIFA Bersaudara, is a cost efficient mine with higher reserves at about 220 million tonnes, although the mine produces much lower CV coal of 3,100-3,400kcal/kg resulting in lower profits compared with TIA. Fitch has not factored any acquisition in its assessment and treats it as an event risk.

Integrated Business Model: ABM's benefits from its integrated business model of four businesses across the energy value chain . The four businesses - coal mining contracting business, low-cost coal mining, a logistics business and an engineering operation - enable ABM to offer services across the value chain to its customers and can provide synergies. The company also benefits from its relationships with affiliated companies, including PT Trakindo Utama, a long-term distributor of Caterpillar, which provides most of the equipment, spare parts and servicing for ABM's coal contracting business. Trakindo is also an important customer for the ABM's logistics and engineering businesses.

Exposure to Cyclical Coal Industry: ABM is vulnerable to the commodity cycle as around 80% of its EBITDA and cash flow is derived from the coal industry. This risk is mitigated by its low-cost position as a coal producer and its integrated business model.

Derivation Summary

ABM's rating is one-notch below PT Bukit Makmur Mandiri Utama (BUMA, BB-/Stable), which is a coal mining contractor. BUMA has a stronger business profile with stronger profitability and stronger market share, and is ranked as Indonesia's second-largest mining contractor. ABM benefits from its diversified business, although the weakening mining contractor business is likely to result in ABM becoming more reliant on relatively more volatile coal sales. Furthermore, BUMA's financial profile is also stronger than ABM's financial profile.

ABM's rating among coal mining peers is comparable with PT Golden Energy Mines Tbk (GEMS, B+/Positive), whose rating is based on the consolidated credit profile of the Golden Energy and Resources Limited (GEAR, B+/Positive). ABM's relatively more diversified business is counterbalanced by GEMS's strong coal operations with longer reserve life and low cost position, as well as the stronger financial profile of GEMS and GEAR. The Positive Outlook on GEMS reflects our expectations of higher production volume in the next two years. (ends)