Fitch Revises Outlook on Waskita Karya to Stable from Negative; Affirms at 'A(idn)'

(Fitch Ratings - Jakarta/Singapore - 19 December 2019)--Fitch Ratings Indonesia has revised the Outlook on builder PT Waskita Karya (Persero) Tbk (WSKT) to Stable from Negative, and affirmed the National Long-Term Rating at 'A(idn)'. Fitch has also affirmed the 'A-(idn)' National Long-Term Ratings on WSKT's IDR10 trillion bond programme and the outstanding issuance under the programme.

The action reflects our view of WSKT's strategic importance to the government's infrastructure development programme.

State-owned construction companies such as WSKT have been at the forefront of the government's infrastructure development programme, which not only requires participants to navigate complex regulatory and bureaucratic hurdles but also requires significant investment in projects (on behalf of government) that have long payback periods. In addition, most of these government contracts involve executing turnkey contracts where payments are received only upon completion. Accordingly, WSKT's weak financial profile reflects the requirement of significant investment in working capital, essentially on behalf of the government, which exerts pressure on financial performance but also suggests a stronger linkage with government.

Private-sector and foreign companies have tended to shy away from government projects in view of weak returns and funding pressures, thereby increasing government's reliance on - and importance of - companies such as WSKT.

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

Key Rating Drivers

Strategic Importance to Government: WSKT's strategic importance to the government stems mainly from its position as the largest contractor of toll-roads in Indonesia and its role as one of the largest investors in toll-road concessions. More than 70% of WSKT's IDR166 trillion of new contracts between 2015 and 2018 consisted of national strategic projects (NSPs), with over 80% of NSPs being toll roads. WSKT has invested in more than 1,000km of toll-road concessions, with 11 completed operational projects and a further seven under construction.

State Ownership, Tangible Support: The Indonesian state owns 66% of WSKT primarily via the Ministry of State Owned Enterprises, and has strong influence over investment decisions, strategy and operations. The state holds a 'golden share' that allows it to veto important decisions regarding the appointment and dismissal of board members, distribution of profit and M&A, among others, irrespective of the presence of minority shareholders. The state injected IDR3.5 trillion of equity into WSKT in 2015, and a further IDR3.5 trillion in 2017 into WSKT's 80% toll-road subsidiary PT Waskita Toll Road.

Healthy Order-Book Growth: We expect the order-book to increase to IDR122 trillion by end-2020, and IDR143 trillion by end-2021, from IDR102 trillion at end-2019. This is lower than we had previously expected because new orders slowed in 9M19, due mainly to the presidential elections in April 2019. We expect new orders of around IDR45 trillion by end-2019, lower than previously projected, but the order-book/revenue ratio should remain healthy at more than 2.0x.

Leverage to Remain High: We have lowered WSKT's SCP to 'bbb-(idn)' from 'bbb+(idn)' because we expect leverage (measured as net adjusted debt / EBITDAR) to remain above 8.0x over the next few years as the company executes its large order-book and aggressive investment plans. WSKT expects to receive around IDR26 trillion in 2019 on the completion of turn-key projects, including IDR10.8 trillion from PT Hutama Karya. However, we understand that WSKT is likely to redeploy this capital into funding its capex and investments over the medium term, impeding any meaningful deleveraging.

Toll Road Divestments: WSKT plans to divest its operational toll roads over the medium term as a means of raising further funds. The company sold its shares in the Solo-Ngawi and Ngawi-Kertosono-Kediri toll roads for IDR2.5 trillion on 18 December. It raised IDR5 trillion in 2018 by selling a 70% stake in three toll roads to a limited participation mutual fund. We have not factored in any divestments in our forecasts as these are subject to material execution risks.

Derivation Summary

WSKT's National Long-Term Rating of 'A(idn)' can be compared with PT Pupuk Indonesia (Persero)'s (PTPI) 'AAA(idn)' rating. PTPI's rating is equalised that of its parent, the Indonesian state, due to strong operational and strategic linkage with government. This is driven by PTPI's strategic role as the government's sole agent in producing and distributing subsidised fertilisers to eligible farmers through a public-service obligation scheme. WSKT has strong strategic and operational ties with government but it is not as politically and socially important as PTPI, and we therefore believe that government will provide PTPI with a greater degree of support than WSKT, if required.

WSKT's national scale SCP of 'bbb-(idn)' is lower than PT Wijaya Karya (Persero) Tbk (WIKA, AA-(idn)/Stable, SCP: a (idn)). WIKA is a large state-owned contractor, and executes strategically important projects for the state. However, WIKA has a lower incidence of turnkey contracts in its order-book and is not a major investor in toll roads such as WSKT. Consequently, WIKA's financial profile is much stronger than WSKT, with leverage likely to remain under 4.5x, justifying WIKA's significantly higher SCP.

WSKT's SCP of 'bbb-(idn)' is higher than PT Lippo Karawaci Tbk's BB+(idn) National Long-Term Rating. Lippo's business profile is substantially weaker than WSKT as it has yet to demonstrate its ability to revive property presales following years of weak project execution and negative buyer perception. Lippo's BB+(idn) rating is supported by its comfortable liquidity over the next 18-24 months, but liquidity could dry up over the longer term if the company is unable to revive sales. WSKT's business profile is strong, as it is the largest state-owned construction company with a solid record of project completion. WSKT's weak financial profile stems primarily from its aggressive investment in toll roads and turnkey projects on behalf of government, but we believe its liquidity to be sufficient - given its healthy access to domestic credit and capital markets. (ends)