Moody's assigns first-time Baa3 rating to Hutama Karya

(Singapore, April 13, 2020) -- Moody's Investors Service has assigned a first-time Baa3 issuer rating to PT Hutama Karya (Persero) (HK). The rating outlook is stable.

RATINGS RATIONALE

As a government-related issuer (GRI), HK's rating combines (1) its b1 baseline credit assessment (BCA), and (2) a four-notch uplift based on Moody's expectation of a very high level of extraordinary support from the government of Indonesia (Baa2 stable) in times of need.

"HK's standalone credit profile reflects its position as one of the largest engineering, procurement and construction (EPC) companies in Indonesia by revenue, with a track record of completing large projects," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst. "Its standalone credit profile also reflects its growing toll operations as the sole developer and operator of the large, multi-year, Trans-Sumatra project."

HK has been assigned as the sole developer and operator of the Trans-Sumatra Toll Roads, which will help transform its business profile from predominantly construction company to the country's largest toll roads operator. Upon completion, the Trans-Sumatra toll road will be the longest toll road in Indonesia.

"Our assumption of very high support from the Indonesian government when needed is underpinned by the government's 100% ownership of HK, its close supervision over HK's operations and budget, and HK's strategic role in achieving Indonesia's infrastructure development objectives, and especially the development of the Trans-Sumatra project," adds Tyagi, also Moody's Lead Analyst for HK.

Reflecting the importance of the Trans-Sumatra project to the Indonesian government, the government also guarantees all debt pertaining to the Trans-Sumatra project, which accounted for 78% of the company's outstanding debt as of December 2019.

HK has a diversified business profile with multiple revenue-generating segments, including EPC, civil & building infrastructure, toll road operations, energy & industrial, property & realty, and construction materials. The operational diversity between the various business segments helps moderate earnings volatility and supports the company's credit profile. HK's order book position as of December 2019 was IDR58.9 trillion. Based on revenues of IDR27.1 trillion for the 12 months to December 2019, this represents a healthy order book to revenue ratio of around 2.2x.

The rating also reflects Moody's expectation that HK will benefit from the Indonesian government's initiatives to accelerate infrastructure development in the country. The state budget allocation for infrastructure more than doubled to IDR340 trillion in 2019 from IDR178 trillion in 2014, and is set to increase a further 4.9% to IDR419 trillion in 2020[1].

However, HK's standalone credit strength is constrained by the significant capital spending required for the Trans-Sumatra project over next 5-6 years, and the inherent cyclicality in the construction industry. As such, any project delays or cost overruns could adversely impact HK's credit profile.

Furthermore, Moody's expects HK's credit metrics will weaken further as work on the Trans-Sumatra project progresses, despite equity injections by the government to support the project.

Specifically, Moody's expects HK's leverage -- as measured by debt/EBITDA -- will increase significantly to around 10x-18x over the next three years as the company generates negative funds from operations.

The Baa3 rating also considers the low carbon transition risk for HK and manageable exposure to social risks, given its reliance on human capital and the impact of demographic and societal trends on traffic volumes over the long term.

The stable outlook reflects Moody's expectation that HK will maintain its relative market position with strong project execution capabilities. The stable outlook also reflects the stable outlook on Indonesia's sovereign rating and HK's strategically important role in supporting Indonesia's construction and infrastructure sectors. (ends)