Moody's changes Indika's outlook to stable from positive
Monday, August 20 2012 - 01:38 AM WIB
"The affirmation of Indika's ratings reflect our expectation that the company will maintain its financial ratios in line with a B1 corporate family rating despite the weakened coal price environment," says Simon Wong, a Moody's Vice President and Senior Analyst.
"However, given Indika's recent debt funded acquisition which limited its ability to deleverage and the weaker coal price environment, Moody's believes Indika will not meet the requirements for a rating upgrade in the next 12 months. The company's rating outlook has therefore been changed to stable from positive," adds Wong, who is also Moody's lead analyst for Indika.
Indika acquired 85% of PT Multi Tambangjaya Utama (MTU), a thermal and coking coal producer based in Central Kalimantan and its associated coal distribution right for USD136 million (on 100% basis) in May.
"Indika's B1 ratings continue to be underpinned by a recurring cash dividend stream from its 46% stake in Kideco which is Indonesia's third-largest coal producer by tonnage," says Wong. "Moody's also expects increasing cash flow contributions from Indika's mining contracting and transport and logistics service businesses."
"The ratings are also supported by Indika's strong liquidity and Moody's expectation that the company's capex will peak this year, such that it will become free cash flow positive next year," says Wong.
The company's cash on hand was USD456.1 million as at 30 June 2012. Its planned capex for this year is USD256.2 million.
Indika's B1 corporate family and senior secured ratings also reflect: 1) its established relationship with its principal South Korean partner, Samtan and the underlying shareholder agreement between Indika and Samtan in ensuring strong dividend cash flows from Kideco, which has maintained a very strong financial profile; and 2) the stable operating and earnings profile of Petrosea -- Indonesia's sixth-largest mining services contractor and which is 69.8% owned by Indika -- and MBSS which is an Indonesian coal transport and logistics services company in which Indika has a 51% stake. The stable operating and earnings profiles of Petrosea and MBBS lower the risks associated with Indika's wholly-owned subsidiary -- Tripatra -- which is involved in the cyclical business of engineering, procurement and construction (EPC).
The ratings also take into consideration 1) Indika's high reliance on the dividend income from Kideco to service its debt, and the inherent volatility in that income source, due to coal price movements; 2) the volatility of cash flows from Indika's EPC tender business and the execution risks associated with the company's expansion plans; and 3) the uncertain regulatory environment for the coal mining industry in Indonesia.
The stable outlook reflects the expectation that Indika will execute its business strategy as planned and maintain its competitiveness in the next 12 to 18 months.
Upward ratings pressure could result from 1) Indika increasing its stake in Kideco to more than 50%; or 2) Indika improving its financial leverage such that its total debt/EBITDA (including dividends from associates) falls below 2.5x, and EBIT/interest increases to more than 3.5x.
Negative ratings pressure could emerge if 1) Indika receives less dividend income from Kideco; 2) Tripatra, Petrosea, and MBSS fail to win tenders and contracts as forecast; 3) the relationship between Samtan and Indika deteriorates; 4) there is evidence of a cash leakage; and 5) Tripatra or Kideco lose orders because of political or economic instability in Indonesia.
Specific indicators Moody's would look for include total debt/EBITDA (including dividends from associates) remaining above 4.0x and EBIT/interest falling below 2 - 2.5x.
PT Indika Energy Tbk 's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside PT Indika Energy Tbk 's core industry and believes PT Indika Energy Tbk 's ratings are comparable to those of other issuers with similar credit risk.
Indika is a listed integrated energy group based in Indonesia. Its principal investment is a 46% stake in Kideco which is Indonesia's third-largest domestic coal producer by tonnage. In addition, Indika is involved in the EPC and operating and maintenance businesses through its wholly owned subsidiary, Tripatra. In April 2011, Indika acquired a 51.0% stake in MBSS -- an Indonesian coal transport and logistics services company. (ends)