Fitch: Indika's Diversification Has Minimal Near-Term Impact

(Fitch Ratings-Singapore-19 May 2021)-- PT Indika Energy Tbk's (BB-/Negative) strategy to reduce exposure coal is neutral for its credit profile, Fitch Ratings says. Fitch thinks Indika will move carefully in executing its diversification strategy, especially as environmental, social and governance (ESG) issues currently have a relatively low impact on the operations and fund-raising ability of Indonesian coal miners.

Indika recently announced it is considering divesting some coal assets and investing up to USD1 billion in non-coal assets to increase the revenue contribution from non-coal businesses to 50% by 2025. Fitch will consider any large investments by Indika as an event risk.

Fitch views Indika's long-term strategy to reduce its exposure to coal-related businesses as prudent, given the increasing ESG pressures that coal mining and related companies will face over the medium term. The diversification should help Indika maintain access to funding markets if there is material tightening for coal-related entities. The company enjoys relatively good access to capital markets and bank funding now.

Most of Indika's investments to support the group's diversification thus far have been small, and have been factored into the ratings, like its oil storage investments. We expect the company to scale up these investments based on their performance.

Indika's credit strength is underpinned by its strong coal mining operations. We expect Indika's coal-related operations to remain the main contributor to its cash flows over the next two to three years, and the contribution from non-coal businesses to increase only gradually. In 2020, Indika derived about 24% of revenue from non-coal businesses, such as from its engineering and construction subsidiary Tripatra and the non-coal-related work from Petrosea. Since 2019 Indika also made small investments totalling USD115 million in fuel storage facilities and USD28 million in its Awak Mas Gold Project.

Indika's bond documents also preclude it from reducing its stake in 91%-owned key mining subsidiary, PT Kideco Jaya Agung, to less than 65% until the bonds are repaid. The last of the bonds mature in 2025. Indika has the option of either reducing its stake in Kideco by 25% upon the renewal of its coal concession in 2023 or paying around USD210 million to maintain its 91% stake.

Fitch expects Indika's earnings in 2021 to improve considerably over 2020, mainly due to better selling prices. Indika's coal contracting and baring operations are also expected to perform well in 2021. Indika's 1Q21 performance reflects the materially improved demand from China for Indonesian coal. (ends)