Moody's affirms United Tractors' rating; outlook remains stable

(Singapore, June 29, 2022) -- Moody's Investors Service has affirmed United Tractors Tbk (PT)'s Baa2 issuer rating.

The outlook remains stable.

"The affirmation reflects United Tractors' strong operating performance amid supportive industry conditions, and improved credit metrics driven by earnings growth combined with debt reduction," says Stephanie Cheong, a Moody's Assistant Vice President and Analyst.

"We expect the company will continue to generate robust earnings and cash flows over the next two years, even as thermal coal prices moderate from current high spot levels," adds Cheong, who is also Moody's lead analyst for United Tractors.

RATINGS RATIONALE

United Tractors' Baa2 issuer rating reflects the company's strong balance sheet, leading market positions in Indonesia for its mining services and heavy equipment businesses, and excellent liquidity profile. The rating also reflects the company's long-term commitment to conservative and transparent financial policies, and minimal reliance on external debt.

United Tractors' Baa2 rating continues to incorporate a one-notch uplift to reflect Moody's expectation of extraordinary support from the parent company, Astra International (P.T.), in a distressed situation. United Tractors is 59.5% owned by Astra. Astra is 50.1% owned by Jardine Cycle & Carriage Limited, which is in turn 75% owned by Jardine Matheson Holdings Limited (A1 stable).

On the other hand, the rating incorporates Moody's expectation for United Tractors to pursue business diversification initiatives away from thermal coal, which will increase its operational and execution risks. Still, the company will likely maintain its financial discipline, strong liquidity and conservative balance sheet while it continues to invest for growth and diversification. 

The rating is also constrained by the credit quality of its counterparties, which are mainly Indonesian coal miners.

United Tractors has benefited from the recovery and rise of thermal coal prices over the past year because around 80% of its revenues are tied to the thermal coal sector, either directly through its mining contracting services and coal mining segments, or indirectly through its construction machinery segment, where customers from the mining industry account for most of its machinery sales.

The company's adjusted EBITDA and operating cash flows improved in the last twelve months ended 31 March 2022 by 52% and 29% respectively, compared to a year ago. United Tractors has deployed cash flows from the supportive industry conditions to reduce debt, thereby increasing its adjusted net cash position to IDR26.5 trillion as of 31 March 2022 from IDR10.6 trillion a year ago.

Moody's believes thermal coal prices will retreat from the current high spot levels towards $150 per metric ton (MT) for the rest of 2022 and further to $60-90 per MT over the medium term due to an increase in production by major exporters outside Russia as weather-related disruptions and border restrictions subside. Nevertheless, the agency estimates that United Tractors' adjusted leverage, as measured by debt-to-EBITDA, will remain low at 0.2x-0.3x over the next two years even as earnings moderate, as the company continues to utilize its high cash balances towards paying down debt. As of 31 March 2022, its adjusted leverage stood at 0.3x, with cash balances in excess of reported debt.

Moody's also expects United Tractors to maintain its excellent liquidity position. As of 31 March 2022, the company had IDR35.7 trillion of cash against IDR6.4 trillion of total reported debt. Its cash holdings and operating cash flow will likely be more than sufficient to cover its short-term debt maturities, estimated capital spending and projected dividends over the next 18 months.

The stable rating outlook balances United Tractors' conservative management and market leadership positions against the cyclicality of the company's core segments. Moody's expects United Tractors will continue to grow in a disciplined manner and maintain significant liquidity and low financial leverage over the next 12-18 months.

The ratings also consider the following environmental, social and governance (ESG) factors.

United Tractors faces elevated environmental risks associated with the coal mining industry, including carbon transition risk as countries reduce their reliance on coal power. This risk is somewhat mitigated because United Tractors' customers supply coal primarily to Asia, where coal will remain a major power source because of significant existing capacity and the continued growth in power demand. That said, Asian coal miners are exposed to material credit implications, including reduced access to funding.

United Tractors is also exposed to social risks associated with the coal mining industry, including health and safety, responsible production and societal trends. This is partially mitigated by the occupational health and safety principles and guidelines implemented by the company, which have led to a decline in overall workplace accidents since 2016.

In terms of governance considerations, the rating factors in United Tractors' long track record of conservative financial policies and continued discipline in capital investments, shareholder returns and liability management.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A rating upgrade is unlikely, owing to sovereign constraints stemming from United Tractors' domestic focus and high correlation with macroeconomic conditions in Indonesia.

Moody's could downgrade the rating if United Tractors takes a more aggressive approach to its financial policies, for example an increase in debt-financed acquisitions or investments, causing its debt/EBITDA to rise above 2.0x for an extended period, with cash balances falling below $500 million.

Moody's could also downgrade the rating if the company's adjusted EBITA margin falls below 15% for a sustained period.

Finally, Moody's could also downgrade the rating if there are signs that Astra is no longer willing or able to support United Tractors, resulting in the removal of the one-notch rating uplift for parental support.

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

United Tractors Tbk (PT) is a distributor of heavy equipment to the mining, construction, forestry and agriculture sectors, and a provider of mining contracting services to the coal sector in Indonesia. The company has three other segments focused on domestic coal production, gold mining and industrial and commercial construction.

United Tractors is 59.5% owned by Astra International (P.T.). The remaining 40.5% share of the company is publicly traded on the Indonesia Stock Exchange. (ends)