Fitch Revises Outlook on ABM Investama to Stable; Affirms at 'B+'

(Fitch Ratings - Singapore - 06 May 2021)-- Fitch Ratings has revised the Outlook on Indonesia-based PT ABM Investama Tbk's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable, from Negative, and has affirmed the rating at 'B+'. Fitch has also affirmed ABM's outstanding senior notes at 'B+' with a Recovery Rating of 'RR4'.

The Outlook revision reflects a strong improvement in ABM's coal-contracting business; we expect further volume growth from new contracts and a ramp-up in production by existing customers after a decline in 2020 to support operating cash flows and partly offset the deterioration in the mining segment's profitability. Leverage should improve modestly and remain adequate for the rating over the next three years, excluding any acquisitions.

ABM's rating reflects its position as an integrated coal producer. Its coal-contracting business and coal mines, which together account for more than 65% of EBITDA, benefit from synergies and diversification from its logistics and engineering arms.

KEY RATING DRIVERS

Improved Contracting Volume: Fitch expects overburden removal volume at PT Cipta Kridatama (CK), ABM's coal-contracting subsidiary, to increase to around 200 million bank cubic metres (mbcm) in the next three to four years. CK recorded 140mbcm overburden volume in 2020, higher than Fitch's expectation and similar to 2018, before CK lost its key customer, Toba Bara, in early 2019. CK's new contracts are signed for life of mine, providing better visibility of long-term volumes and lower renewal risk, relative to its earlier short-term contracts.

Weakening Coal Mining Operations: Fitch expects mining segment profitability, measured by EBITDA/tonne, to decline to around USD2.5 (2020: USD3.0) from lower production volume at its PT Tunas Indi Abadi (TIA) mine. ABM's other mines - PT MIFA Bersaudara (MIFA) and PT Bara Energi Lestari (BEL) - produce lower calorific value coal, leading to lower realisations and profitability. Production volume should rise to about 15 million tonnes (MT) in next two to three years (2020: 12MT), with higher volume at MIFA and BEL offsetting TIA's decline.

Acquisition an Event Risk: ABM plans to acquire a coal mine to improve the profile of its coal mining portfolio and replenish the depleting coal reserves at its key mine, TIA, but has not yet finalised any deal. TIA has only a three-year reserve life at 2020 production levels of 3.4MT. Fitch has not factored in any acquisitions in its assessment and will treat any acquisitions as an event risk. MIFA and BEL had coal reserves of about 203MT and 32MT, respectively, as of end-2020.

Stronger Cash Flow: Fitch expects higher coal contracting volume to improve ABM's operating cash flow, despite weaker profit from the coal mining segment based on our coal-price assumptions. We forecast ABM's EBITDAR to range between USD180 million-200 million over the next three years, after deteriorating over the last two years (2020: USD97 million).

Moderate Capex, Improving Credit Metrics: We expect average annual capex of around USD75 million (2020: USD71 million) over the next four years. The capex is mainly for maintenance and capacity expansion at CK. The moderate capex, together with stronger operating cash flow, should see FFO adjusted net leverage improve to and remain at around 2.5x (2020: 2.9x) over the next three years. However, rising operating lease expenses, which form part of ABM's asset-light strategy, will constrain FFO fixed-charge coverage to or below 2.5x (2020: 2.2x).

Integrated Business Model: ABM benefits from an integrated business model, with four businesses across the value chain. These businesses - coal mining contracting, coal mining, logistics and engineering - create synergies and enable ABM to offer services across the value chain.

ABM also benefits from relationships with affiliated companies, including PT Trakindo Utama, a long-term distributor of Caterpillar Inc. (A/Stable), which provides most of the equipment, spare parts and servicing for ABM's coal contracting business. Trakindo is also an important customer of 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 integrated business model.

DERIVATION SUMMARY

ABM's closest peer is PT Bukit Makmur Mandiri Utama (BUMA, BB-/Negative). ABM benefits from diversification across business segments and a stronger financial profile, but its core contracting business is weaker than BUMA's, justifying a notch difference in its credit assessment, in our view. BUMA enjoys higher market share and a better customer base. It ranks as Indonesia's second-largest mining contractor, with annual overburden volume that is almost twice that of ABM. The Negative Outlook on BUMA's rating reflects its low rating headroom, as we expect its credit metrics to remain close to the negative sensitivities.

Within coal mining peers, ABM can be compared with PT Golden Energy Mines Tbk (B+/Stable), which we assess based on the consolidated credit profile of Golden Energy and Resources Limited (GEAR, B+/Stable). GEAR has a longer reserve life, higher operational flexibility and a lower cost position than ABM, but ABM benefits from its portfolio of diversified businesses.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Newcastle coal price in line with Fitch's price deck; 2021: USD72/tonne; 2022-2024: USD66/tonne. ABM's coal prices are adjusted for calorific value.

- Overburden volume to increase by 23% to around 170mbcm in 2021, thereafter we assume an average annual increase of 3% for the next three years.

- Coal mining sales volume to increase by 15% in 2021 and about 8% in 2022, and thereafter start to decline.

- Cumulative capex of around USD300 million in 2021-2024

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- An upgrade is unlikely over the short term, although a material improvement in ABM's coal contracting or mining business, while maintaining an appropriate financial profile in relation to the business profile, may lead to an upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Deterioration in the company's core operating segment, including, but not limited to, failure in retaining major customers.

- Cash flow generation falling short of Fitch's expectations, leading to a sustained deterioration in credit metrics, as follows: FFO adjusted net leverage above 3.0x and FFO fixed-charge cover below 2.0x.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Refinancing Due in 2022: ABM had cash and cash equivalents of around USD110 million against outstanding short-term debt of USD40 million as of end-2020. The company entered a loan agreement in March 2021 for a working-capital facility of USD50 million with a one-year expiry to support its short-term liquidity profile. Its only US-dollar note will mature in 2022, which ABM is likely to refinance, as we believe it will have insufficient internal cash flow to cover the repayment. Nevertheless, the company is already in discussions about issuing a new US-dollar note to refinance the 2022 bond.

CRITERIA VARIATION

We applied a variation under our Corporate Rating Criteria by using multiple-based lease-adjusted credit metrics to assess ABM's rating, instead of unadjusted ratios as defined in the criteria, to better reflect ABM's financial profile, given its strategy of using operating leases for its core assets in its mining contracting business.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)