PEFINDO: PT Adhi Karya (Persero) Tbk’s rated “idA-”, outlook revised to stable

(August 9, 2021)--PEFINDO has affirmed its “idA-” ratings for PT Adhi Karya (Persero) Tbk (ADHI) and its shelf-registered bond I, shelf-registered bond II, and shelf-registered bond III. The outlook for the corporate rating has been revised to “stable” from “negative”. The outlook revision reflects our expectation that ADHI will maintain its financial profile with strong access to funding which subsequently will support its liquidity despite operating at a weaker credit metrics due to slower construction progress and longer cash cycle because of Covid-19 pandemic as well as growing funding needs for working capital. ADHI was able to manage its liquidity from the risk of cash flow miss match stemming from its project’s long life cycle, evidenced by its ability to continuously rolled over its short-term working capital loans with domestic banks, state-owned in particular. In addition, we also expect ADHI to improve its earnings visibility on account of a relatively strong new contract wins in 2020 and 1H21, which adds scale and lessens the concentration risk from its ongoing projects in the Greater Jakarta LRT and Aceh-Sigli toll road.

An obligor rated idA has a strong capacity to meet its long-term financial commitments relative to those of other Indonesian obligors.

However, the obligor is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than higher-rated obligors. The minus (-) sign indicates that the rating is relatively weak within the respective rating category.

The rating reflects ADHI’s strong market position in the construction sector, its benefits as a state-contractor, and its strong synergy with subsidiaries which should support margin improvement. The rating, however, is constrained by its high leverage and weak cash flow protection measures, execution risks related to growing order book, and a volatile business environment in the construction sector.

The rating may be raised if ADHI is able to maintain its discipline approach towards investments backed by strong order book and successful execution on these order books along with improvement in credit metrics on a sustained basis. The rating may be lowered if ADHI incurs significantly more debt than projected owing to a more aggressive approach towards investments or a weaker than expected execution on its order books, resulting in leverage becoming more elevated and interest coverage ratio weakens on sustained basis. We may also lower the rating if we believe ADHI’s access to funding deteriorates which may impact its capacity to refinance upcoming debt maturities or service its debt.

ADHI, established in 1960, is a state-owned contractor company primarily engaged in providing construction services. Its business is classified into four main segments: construction; engineering, procurement and construction (EPC); property and realty; and investment infrastructure. As of June 30, 2021, its shareholders were the Indonesian government (51.0%) and the public (49.0%). (ends)