Fitch Rates Waskita Beton's IDR1.5 Trillion Bond at 'BBB+(idn)'

(Fitch Ratings-Jakarta-23 October 2019)-- Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'BBB+(idn)' to PT Waskita Beton Precast Tbk's (BBB+(idn)/Negative) proposed unsecured bond of up to IDR1.5 trillion due 2022.

Assuming full subscription, this issuance will be the second and final launch from Waskita Beton's IDR2 trillion bond programme, which Fitch rated at 'BBB+(idn)' on 8 May 2019. The proposed notes as rated at the same level as Waskita Beton's National Long-Term Rating because they will represent its senior unsecured obligations.

'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

Linkage with Waskita Karya: We assess the linkage between Waskita Beton and its parent, PT Waskita Karya (Persero) Tbk (A(idn)/Negative) as 'Moderate' on moderate operational and strategic linkages, despite weak legal linkage. Waskita Karya sources most of its precast concrete components for its toll-road construction projects from Waskita Beton and has strong control over its subsidiary's key management appointments and budget. However, Waskita Beton's contribution to its parent's consolidated revenue is small. Hence, we provide a one-notch uplift from Waskita Beton's Standalone Credit Profile (SCP), based on a stronger parent approach under our Parent and Subsidiary Rating Linkage criteria.

Dependent on Parent: Waskita Karya, which specialises in toll roads, is among Indonesia's largest state-owned construction companies. This provides Waskita Beton with a competitive advantage in an industry that Fitch sees as having low barriers to entry. However, deterioration in Waskita Karya's business and financial profile would hurt Waskita Beton's credit profile.

New Contracts Recovery: We project Waskita Beton's new contracts to increase by 30% in 2019, in line with our expectation that Waskita Karya will book new contract growth of 40%, supported by its plan to bid for major toll-road projects during the year. Waskita Beton booked new contracts worth IDR3.3 trillion as at end-1H19, which was down by 17.1% yoy. However, new contracts should increase in 2H19 with more toll-road projects to be tendered, which Waskita Karya will participate in, after the new government regime officially starts. Waskita Beton's new contracts fell by 40% to IDR6.7 trillion in 2018, following a 51% fall in new contracts at Waskita Karya as well as tougher competition in the precast-component sector.

Margins to Fall: We expect EBITDA margins to be lower in coming years due to a decreasing contribution from turnkey projects, which have higher profit margins, and an increasing share of orders from non-toll-road industries and companies outside of Waskita Karya, which also tend to yield lower margins. Waskita Beton's strong order-book growth is supporting revenue visibility in the medium term, with order book/revenue of 2.2x in 2018, despite the slowdown in new contracts last year.

Positive Operating Cash Flow: We expect Waskita Beton's liquidity and cash flow to continue improving, supported by its plan to minimise projects that pay on a turnkey basis and focus on those that use progress payments in the medium term. Cash flow should be further supported by the company's expected total turnkey payments of IDR5 trillion in the next two years, following the completion of the Cimanggis-Cibitung and Krian-Legundi-Bundar-Manyar toll-road projects, which are being constructed by Waskita Karya.

Waskita Beton's liquidity improved in 2018, with operating cash flow of IDR1.8 trillion (1H19: IDR312 billion), following three years of negative operating cash flow due to the high working capital needed to undertake several turnkey projects. Cash flow turned positive after Waskita Beton received turnkey payments from Waskita Karya of around IDR3.9 trillion after the completion of several toll-road sections, such as the Bekasi-Cawang-Kampung Melayu toll road.

Manageable Leverage: We expect Waskita Beton's leverage, as measured by adjusted net debt/EBITDAR, to remain manageable at below 3.0x in 2019-2022 due to lower capex intensity (capex/revenue). We do not expect major capacity additions in the medium term, as the company recently expanded to support Waskita Karya's order book, which raised its capacity to 3.5 million tonnes per annum in 2018, from 800,000 tonnes in 2014.

DERIVATION SUMMARY

Waskita Beton's SCP is comparable with that of PT Aneka Gas Industri Tbk (A-(idn)/Stable) and PT Sulfindo Adiusaha (BBB-(idn)/Stable).

Waskita Beton has larger scale in terms of EBITDA and lower leverage than Aneka Gas, but this is counterbalanced by Aneka Gas's higher and stable margin due to long-term contracts with a good cost pass-through mechanism. Aneka Gas is also the leader in a market with high barriers to entry, while Waskita Beton competes in an industry with low barriers to entry. Waskita Beton's rating is constrained by its higher customer-concentration risk, as it depends on its parent for contracts and payments. Hence, Waskita Beton's SCP is two notches below the rating on Aneka Gas.

Sulfindo's more diversified customer portfolio translates to less concentration risk compared with Waskita Beton. However, Waskita Beton has a better financial profile, as reflected in lower leverage, better coverage and a higher margin. Sulfindo also has higher refinancing risk, as its annual debt servicing obligation capability is dependent on favourable pricing of its key chemical products, which is volatile, as the company has reached full utilisation capacity. Hence, Waskita Beton's SCP is one notch higher than Sulfindo's rating.

Waskita Beton's one-notch uplift from its SCP is similar to the treatment of companies that have moderate linkages with their parents, such as PT PP Properti Tbk (BBB+(idn)/Negative; SCP: bbb(idn)). Both companies' parents control their boards and share their brand names. In addition, both have received comparable tangible support, such as assets and shareholder loans, from their respective parents during their early stages of development. Both companies also make minimal contributions to their parents' consolidated financial profiles. Hence, we view that a one-notch uplift of support from their SCP are warranted. (ends)