Fitch Downgrades Waskita Beton to 'BB(idn)'; Outlook Negative

(Fitch Ratings - Jakarta - 29 May 2020)--Fitch Ratings Indonesia has downgraded precast concrete manufacturer PT Waskita Beton Precast Tbk's (WSBP) National Long-Term Rating to 'BB(idn)', from 'BBB-(idn)', with a Negative Outlook. At the same time, Fitch has downgraded WSBP's IDR2 trillion unsecured bond programme and the bonds issued under the programme to 'BB(idn)', from 'BBB-(idn)'.

The downgrade and the Negative Outlook follows similar rating action on parent, PT Waskita Karya (Persero) Tbk (WSKT, BBB+(idn)/Negative), after Fitch lowered the parent's Standalone Credit Profile (SCP) to 'bb(idn)', from 'bbb-(idn)', on a weakening financial profile. Fitch rates WSBP - which we believe has a stronger credit profile than the parent, as evidenced by its SCP of 'bbb-(idn)' - based on WSKT's SCP due to moderate ties between to two entities.

'BB' National Ratings denote an elevated default risk relative to other issuers or obligations in the same country or monetary union.

KEY RATING DRIVERS

Parent's Weakening SCP; Stronger Subsidiary: WSBP's rating is based on its parent's SCP, which Fitch revised to 'bb(idn)' on 29 May 2020 on account of weaker credit metrics and increasing liquidity pressure. We believe WSBP has a stronger profile, with an SCP of 'bbb-(idn)', and accordingly, follow the 'Stronger Subsidiary' path under our Parent and Subsidiary Rating Linkage criteria. We assess legal and operating ties to be moderate due to senior management overlap and influence over WSBP's investments, strategy and operation, and therefore base WSBP's rating on WSKT's SCP.

Pandemic-Related Contract, Project Delays: Fitch believes the coronavirus pandemic will lead to fewer new contract tenders, delay project completions and extend customer payments due to restrictions imposed by large-scale social-distancing measures. We forecast new contract wins to drop by around 10% in 2020 to IDR6.3 trillion (2019: IDR7.0 trillion) as project owners delay tender processes. Precast production at full capacity will also be challenging, assuming that social-distancing measures will remain in place throughout 2Q20, as WSBP will have to reduce its production workforce.

This will translate into higher working-capital requirements in 2020 that pressure WSBP's cash flow from operation - necessitating higher debt to cover the cash flow mismatch. Nonetheless, we believe that WSBP has some room to cut annual capex to around IDR200 billion in 2020 and 2021 (2019: IDR926 billion) to alleviate cash flow pressure.

Rising Leverage: We have revised our assessment of WSBP's SCP to 'bbb-(idn)', from 'bbb(idn)', on account of higher leverage, as we expect net debt/EBITDA to remain above 4.0x until 2021. Fitch expects free cash flow to remain negative for the next two years due to a longer working capital cycle and under the assumption of IDR200 billion in annual capex. Total debt increased to IDR6 trillion in 2019, from IDR4.9 trillion in 2017, closing the free cash flow deficit. Nonetheless, WSBP's EBITDA/interest coverage should remain adequate at above 2.0x.

Increasing Contract Diversification, Margin Pressure: WSBP has lowered reliance on contracts from WSKT; it had derived 51% of revenue from WSKT and subsidiaries in 2019, compared with 80% in 2018. However, such diversification also leads to a lower EBITDA margin, as private projects are generally more competitive and have higher costs. WSBP's EBITDA margin declined to 21% in 2019, from around 25% in 2018, as its revenue portion shifted away from WSKT.

DERIVATION SUMMARY

WSBP's SCP is well-positioned compared with PT Aneka Gas Industri Tbk (A-(idn)/Stable). WSBP has larger scale in terms of EBITDA and lower leverage. However, this is outweighed by Aneka Gas's higher and stable margin due to long-term contracts with a satisfactory cost pass-through mechanism. Aneka Gas is also a leader in a market that has high entry barriers, while WSBP competes in a competitive industry with low entry barriers, which is reflected in its weaker profitability. Hence, WSBP is rated three notches below Aneka Gas.

WSBP's SCP is three notches higher than that of palm-oil producer, PT Sawit Sumbermas Sarana Tbk (SSMS) (BB-(idn)/Stable). This reflects WSBP's lower leverage and coverage, whereby SSMS recorded net debt/EBITDA above 10x and EBITDA/interest below 1.0x in 2019. WSBP also has better funding access, with various working-capital facilities from both domestic and foreign banks. (ends)