Moody's revises BUMA's outlook to stable; affirms Ba3 ratings

(Singapore, February 17, 2023) -- Moody's Investors Service has affirmed Bukit Makmur Mandiri Utama (P.T.)'s (BUMA) Ba3 corporate family rating (CFR) and the Ba3 rating on its senior secured notes.

At the same time, Moody's has revised the outlook to stable from negative.

"The revision in outlook to stable from negative reflects BUMA's solid progress in executing its strategy to grow and diversify operations, resulting in stronger credit metrics and lower concentration risks, "says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

"The outlook revision also reflects our expectation of lower governance risk associated with BUMA's financial strategy and risk management as the company adheres to prioritizing positive free cash flow generation for debt reduction and maintains modest shareholder returns," adds Hasnain, who is also Moody's lead analyst for BUMA.

"BUMA's credit quality will be supported by higher overburden removal volumes, and good liquidity with modest expansionary capital spending and dividends over the next 12-18 months," adds Hasnain.

RATINGS RATIONALE

BUMA's geographic and product diversity will continue to improve amid new contracts and the extension of existing contracts with Australian metallurgical coal miners. Moody's estimates BUMA's Australian operations will constitute close to 30% of its revenue in 2023. Prior to its Australian contract mining business acquisition in December 2021, the company was wholly reliant on Indonesian thermal coal miners for its revenue and earnings.

BUMA's customer composition will also improve, further supporting its credit quality and reducing concentration risk. BUMA's revenue from its largest customer, Berau Coal (P.T.) has already declined to around 28% for the nine months ended September 2022 (9M 2022) from 45% in 2021, as BUMA increased overburden removal volumes at Adaro Indonesia (P.T.) (Ba1 stable) and Bayan Resources Tbk. (P.T.) (Ba2 stable), two of Indonesia's largest and most creditworthy coal miners which constituted around 32% of BUMA's revenue for 9M 2022. BUMA also generated 11% of revenue from BHP Mitsubishi Alliance, a subsidiary of BHP Group Limited (A2 ratings under review) during the same period.

Moody's expects BUMA's earnings will remain healthy, supported by higher overburden removal volumes and stable contract rates. As a result, the company's leverage, as measured by adjusted debt/EBITDA, will remain around 2.6x over the next 12-18 months, considerably below 4.2x in 2021, immediately following its large debt-funded capital spending on new projects in Indonesia and Australia.

Moody's also expects BUMA will maintain good liquidity with sufficient internal cash sources to meet cash needs through March 2024. Its capital spending will remain low at around $100 million - 150 million in 2023, primarily for equipment maintenance and replacement. The company also has manageable annual debt repayments with no large maturities until early 2026, when a final payment of around $120 million under its syndicated loan facility matures in January 2026, and its $400 million notes mature in February 2026.

The outlook is stable, reflecting Moody's expectation that BUMA will achieve its expected volume increase over the next 12-18 months while improving its leverage and cash flow metrics, and maintain good liquidity with a prudent approach to new investments and shareholder returns.

ESG CONSIDERATIONS

Governance consideration was a key driver of the rating action given Moody's expectations that BUMA will adhere to conservative financial policies around investments and shareholder returns. Consequently, Moody's has changed the governance issuer profile score to G-3 from G-4 and the ESG credit impact score to CIS-3 from CIS-4.

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

Moody's could upgrade the ratings if BUMA (1) continues to grow its scale and increase commodity diversification without weakening its credit metrics or materially increasing execution risk; (2) does not pursue more aggressive financial policies regarding growth and shareholder returns; and (3) maintains good liquidity while proactively refinancing or repaying its large debt maturities due in the first quarter of 2026, well ahead of the scheduled maturity.

Specific indicators that Moody's would consider for an upgrade include adjusted debt/EBITDA staying below 2.5x, and EBITA/Interest rising above 3.0x, both on a sustained basis.

Moody's could downgrade the ratings if (1) BUMA's liquidity weakens such that its cash sources are insufficient to meet its cash needs over the next 12-18 months; (2) its underlying financial policies change materially; (3) it is unable to win new contracts, or if its expiring contracts are not renewed on similar or enhanced terms; (4) its earnings or profitability declines; or (5) payments from its largest customer, Berau Coal, are delayed, such that the average period for payment collection exceeds 65 days.

Credit metrics indicative of a downgrade include adjusted debt/EBITDA staying above 3.5x or EBITA/interest expense staying below 2.0x, on a sustained basis.

Moody's could notch down the ratings on BUMA's notes from its CFR if secured bank debt constitutes a larger proportion of the company's consolidated debt than its US dollar notes do, or if most of its consolidated claims are at future non-guarantor subsidiaries.

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.

Established in 1998, Bukit Makmur Mandiri Utama (P.T.) (BUMA) is a mining services contractor in Indonesia and Australia, providing open-cut mining services to thermal and metallurgical coal producers. BUMA is 100% owned (less one share) by PT Delta Dunia Makmur Tbk, an investment holding company listed on the Indonesia Stock Exchange. (ends)