Fitch Downgrades Waskita Beton to 'BBB-(idn)'; Outlook Stable

(Fitch Ratings - Jakarta - 19 December 2019)--Fitch Ratings Indonesia has downgraded Indonesian-based precast concrete producer PT Waskita Beton Precast Tbk's (WSBP) National Long-Term Rating to 'BBB-(idn)', from 'BBB+(idn)', with a Stable Outlook. At the same time, Fitch has downgraded WSBP's IDR2 trillion unsecured bond programme and the bonds issued under the programme to 'BBB-(idn)', from 'BBB+(idn)'.

WSBP's downgrade follows similar rating action on its parent PT Waskita Karya (Persero) Tbk's (WSKT, A(idn)/Negative), where we lowered the Standalone Credit Profile (SCP) to 'bbb-(idn)', from 'bbb+(idn)', due to its high leverage. Fitch rates WSBP, which we believe has a stronger credit profile as its SCP is affirmed at 'bbb(idn)', based on WSKT's consolidated National SCP of 'bbb-(idn)' due to the moderate ties between parent and subsidiary. We believe that WSBP's profitability and liquidity are aligned and dependent on WSKT's ability to win new contracts. Fitch also believes that WSBP's ratings will continue to be linked to WSKT's standalone rating until the company can change the mix of its new contracts such that it is less reliant on WSKT on a sustained basis without further deterioration in its financial profile. 

For details on the drivers and sensitivities for the ratings on WSKT, see the latest Rating Action Commentary, dated 19 December 2019.

'BBB' National Ratings denote a moderate level of default risk relative to other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Weakening Parent SCP; Stronger Subsidiary: WSBP's rating is based on its parent's SCP which was lowered to 'bbb-(idn)' on 19 December 2019, on account of weak financial profile as indicated by its high leverage. Fitch believes that WSBP has a stronger profile with the SCP at 'bbb(idn)' and accordingly, we follow the 'Stronger Subsidiary' path under Fitch's Parent and Subsidiary Rating Linkage criteria. Fitch assesses the legal and operating ties to be moderate and therefore WSBP's rating is based on WSKT's consolidated SCP of 'bbb-(idn). Our conclusion of moderate ties reflects the senior management overlap and influence over the company's investment decisions, strategy and operations.

Cash-Flow Dependent on Parent: WSBP was established to support WSKT's toll-road operations, and this dependency is reflected in the high revenue concentration - around 85% - to WSKT. Fitch believes WSBP's ratings will to be aligned with the economic interest of WSKT's SCP until WSBP can reduce its high revenue concentration to WSKT. WSKT, which specialises in toll roads, is among Indonesia's largest state-owned construction companies. This provides WSBP with a competitive advantage in an industry that Fitch sees as having low barriers to entry. However, a weakening of WSKT's business and financial profile would also be negative for WSBP's credit profile.

New Contract Recovery: We forecast WSBP's new contract wins to recover by 10%-15% in 2020-2022F, in line with our expectation that that WSKT will book similar new contract growth in the same period supported by winning major toll-road projects. We also expect major toll-road tenders to pick up in 2020 after ndonesia's (BBB/Stable) government further increased its infrastructure-related budget to IDR423.3 trillion (+5.9% yoy) in its 2020 budget. The absence of major toll-road tenders in 9M19, due to the recent presidential elections, resulted in WSKT's weaker new contract growth, which in turn affected WSBP's new contract achievement of only IDR3.7 trillion (-14 % yoy) in 9M19.  

Improving External Contracts; Thinner Margins: WSBP's improving ability to obtain non-toll road contracts from external parties has mitigated the impact of WSKT's slow new contract growth. WSBP obtained external new contracts of IDR1.6trillion (+11% yoy), including from non-toll road sectors such as property, as of end-September 2019. This increased WSBP's non-WSKT new contract portion to 44% (2018: 36%). WSBP is making some progress in diversifying its customer base; nonetheless, we believe  its ratings will continue to be dependent on WSKT's SCP.

WSBP aims to further strengthen its presence in the external market from highly competitive non-toll road projects to further diversify its order book by acquiring licences to construct other products, such as electricity poles and railway platform-related products. However, Fitch expects the increasing share of non-WSKT orders from non-toll road industries and decreasing contribution from wider-margin turnkey projects might lower WSBP's EBITDA margin to around 18% (2018: 25%) in the medium term. This has been reflected in WSBP's EBITDA margin decline to 18.1% in 9M19, which was exacerbated by the slowing new contracts from WSKT's higher-margin toll road projects. WSKT's ability to continue to win contracts from non-related-parties is relatively challenging - given there is higher competition, from both domestic an internaitonal precast manufacturers, and low barriers to entry in the segment.

Higher Leverage: We expect WSBP's leverage - measured by adjusted net debt/operating EBITDAR - to increase to between 3.0x and 4.0x in 2019-2022 (2018: 2.0x) due to the increasing thinner-margin projects and heavier working-t capital requirements. This is evident from WSBP's already-higher last-12-months (LTM) leverage of 3.8x in 9M19.

Positive Operational Cash Flow: WSBP's cash flow from operations (CFO) should be supported by the expected turnkey payments of around IDR900 billion from the completion of the Krian-Legundi-Bunder-Manyar toll road project in 2020. Moreover, we expect lower exposure to turnkey projects will provide less pressure to WSBP's cash flow. WSBP continued to book positive CFO of IDR82 billion as of end-September 2019 (2018: IDR1.8 trillion), after experiencing material negative CFO generation in 2015-2017.

Derivation Summary

WSBP's 'bbb(idn)' SCP is comparable with national-rated peers, such as PT Aneka Gas Industri Tbk (AGI, A-(idn)/Stable) and PT Sawit Sumbermas Sarana Tbk (SSMS, BBB-(idn)/Stable). 

WSBP has larger scale than AGI in terms of EBITDA and lower leverage. However, this is outweighed by AGI's higher and stable margins due to long-term contracts with a satisfactory cost pass-through mechanism. AGI is also the leader in a market that has high barriers to entry, while WSBP competes in an industry that is competitive because of low barriers to entry, and this is reflected in WSBP's weaker profitability. Hence, WSBP is rated two notches below AGI's rating.

We believe that WSBP and SSMS, which is rated based on its parent PT Citra Borneo Indah's (CBI) consolidated profile, has similar operational scale. We expect CBI to have considerably higher leverage of between 5.0x-5.5x in the medium term, which is also affected by sustainable losses from its other businesses and a weakening crude palm oil (CPO) price, compared with WSBP's projected leverage of between 3.0x-3.5x during the same period. As a result, WSBP's SCP is rated one notch above SSMS. (ends)