Fitch Affirms ABM Investama at ‘B+’; Outlook Stable

Fitch Ratings has affirmed PT ABM Investama Tbk’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’. The Outlook is Stable. Fitch has also affirmed ABM’s outstanding senior unsecured US dollar notes at ‘B+’ with a Recovery Rating of ‘RR4’.

The affirmation reflects our view that ABM’s business profile will remain in line with its rating in the near-term and incorporates our conservative growth estimates for ABM’s coal-contracting business under its subsidiary, PT Cipta Kridatama (CK), compared with ABM’s expectation.

We expect ABM’s financial profile to remain strong for its rating, with net leverage, measured by net adjusted debt/EBITDAR, remaining below 1.0x (2021: 0.8x) over the next two years, based on our coal-price assumptions. ABM has been evaluating inorganic growth opportunities, especially in its coal mining segment; we currently treat this as an event risk.

KEY RATING DRIVERS

Rising Contracting Volume: We expect CK’s overburden volume to reach 250 million bank cubic metres (mbcm) by 2024 (2021: 179mbcm). The volume expectations are based on higher planned production at CK’s customers and the addition of PT Borneo Indobara (BIB) in late 2021. BIB is the key mine of PT Golden Energy Mines Tbk (GEMS, B+/Positive), which we expect to drive GEMS’ significant volume growth over the next three years. We expect GEMS’ annual coal production to reach 50 million tonnes (MT) by 2025 (2021: 29MT, 2020: 34MT).

ABM expects its top-three customers to contribute 70% of its total volume in the next two to three years. We believe ABM’s expansion plan will be supported by its relationships with affiliated companies, including PT Trakindo Utama, a long-term distributor of Caterpillar Inc. (A/Stable), which provides most of the equipment, spare parts and servicing for ABM’s coal-contracting business. Trakindo is also an important customer of ABM’s logistics and engineering businesses.

Adequate Cash Flow; High Capex: We expect ABM’s cash flow to remain adequate to support its strong financial profile. ABM’s capex requirements will increase with its plan to own its mining equipment in a move away from its asset-light strategy of relying on operating leases. We estimate capex of around USD450 million at CK over the next four years, including for maintenance and expansion, with USD320 million spent in 2022-2023. ABM has recently obtained USD100 million of bank facilities to partly fund capex at CK.

Weakening CoalMining Profitability: We forecast the profitability of the mining segment, measured by EBITDA/tonne, to plunge by two-thirds from around USD18 in 2021 due to reserve depletion at ABM’s PT Tunas Indi Abadi (TIA) mine by 2023. ABM’s other mines – PT MIFA Bersaudara and PT Bara Energi Lestari (BEL) – produce lower calorific value coal, which will also lower profitability. We expect production volume to remain at about 13MT (1Q22: 3MT, 2021: 13MT), with higher volume at MIFA and BEL offsetting TIA’s decline.

Acquisition an Event Risk: ABM plans to acquire a coal mine to boost the profitability of its coal mining segment and replenish the depleting coal reserves at TIA. We will treat any acquisitions as an event risk. MIFA and BEL both have reserves lives of more than 20 years based on their 2021 production volume.

Regulatory Risk: We believe the Indonesian government’s month-long ban on coal exports in January 2022 highlights increased regulatory risk, especially for miners that are not compliant with domestic market obligations (DMOs). The ban has been lifted for miners that meet a minimum local-sale requirement of 25% under the DMO. MIFA and BEL are not usually DMO compliant, given their low calorific value coal and remote geographic location, which resulting in poor domestic demand. TIA is generally DMO compliant.

The DMO non-compliance penalty is minor, at around USD7 million in 2021, but the export ban led to ABM cutting production in 1Q22, which may lower its full-year volume. Nevertheless, we believe high coal demand and prices should support the company’s financial profile in 2022.

Integrated Business Model: ABM benefits from the synergies created by its integrated business model, with four businesses across the value chain; coal-mining contracting, coal mining, logistics and engineering. However, the majority of earning are linked to thermal coal, with the coal-contracting business and coal mines together accounting for more than 70% of EBITDA.

DERIVATION SUMMARY

ABM’s closest peer is PT Bukit Makmur Mandiri Utama (BUMA, BB-/Stable). ABM benefits from diversification across business segments and a strong financial profile, but we expect its core contracting business, though expanding, to remain smaller than BUMA’s, justifying a notch difference in its credit assessment. BUMA has higher market share, a superior customer base and greater geographic diversification following the acquisition of Downer EDI Limited’s (BBB/Stable) coal-mining servicing business in Australia. BUMA ranks as Indonesia’s second-largest mining contractor, with annual overburden volume that is almost twice that of ABM.

ABM can be compared with Golden Energy and Resources Limited (GEAR, B+/Positive), which has a stake in a few coal mines. GEAR’s rating benefits from high reserves at all its key mines, with greater operational flexibility and a lower cost position than ABM’s coal mining segment. GEAR also benefits from exposure to thermal and metallurgical coal. ABM, on the other hand, is supported by its diverse business portfolio. The Outlook on GEAR reflects our expectation that the credit profile of its key subsidiary, GEMS, is likely to improve over the next 12 months, with production scale reaching a level commensurate with that for ‘BB-‘ rated peers in Indonesia.

KEY ASSUMPTIONS

Fitch’s Key Assumptions Within Our Rating Case for the Issuer

– Newcastle coal price in line with Fitch’s price deck; 2022: USD270/tonne; 2023: USD120/tonne, 2024: USD 87/tonne and 2025: USD80/tonne. ABM’s coal prices are adjusted for calorific value

– Overburden volume to reach 250mbcm by 2024

– Coal mining sales volume to increase slightly in 2022, then decline

– Cumulative capex of around USD520 million during 2022-2025

– Average annual dividend pay-out of 35%

 

KEY RECOVERY RATING ASSUMPTIONS

The recovery analysis assumes that ABM would be reorganised as a going concern in bankruptcy rather than liquidated. We assume a 10% administrative claim.

ABM’s going-concern EBITDA is based on the average EBITDA we expect over 2024-2025. This reflects a sustainable earnings level based on our medium-to-long term coal-price assumptions.

-An enterprise value/EBITDA multiple of 3.0x is applied to the going concern EBITDA to calculate a post-reorganisation enterprise value.

-We assume prior-ranking debt, including a short-term loan of USD32 million, in the distribution waterfall, as well as around USD150 million in a syndicate facility as of end-March 2022 will be repaid before ABM’s senior unsecured US-dollar bond.

The assumptions result in a recovery rate corresponding to a Recovery Rating of ‘RR1’. However, ABM operates in Indonesia, which Fitch classifies as under Group D of jurisdictions, as a result, the Recovery Rating for ABM’s senior debt is capped at ‘RR4’.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– A sustained improvement in ABM’s coal mining or contracting business, while maintaining an appropriate financial profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Deterioration in the company’s core operating segment, including failure in retaining major customers.

– Earning generation falling short of our expectations, leading to a sustained deterioration in credit metrics, including FFO adjusted net leverage or EBITDAR adjusted net leverage at above 3.0x (2021: about 1x) and FFO fixed-charge cover or EBITDAR/interest + rent expense at below 2.0x (2021: 4.3x).

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Comfortable Liquidity: ABM’s liquidity benefits from a well spread out debt maturity from the amortising nature of most of its debt. Its annual debt maturity will remain below USD50 million until 2026, when its only US-dollar note of USD200 million matures. We expect average annual cash flow from operation to remain strong at USD200 million and estimate ABM’s cash balance at around USD290 million at end-June 2022.

ISSUER PROFILE

ABM is an Indonesian integrated company with businesses spanning coal mining, mining contracting, and logistics, engineering and fuel services. It is majority-owned and controlled by the Hamami family, with about 21% of its shares listed on the Jakarta Stock Exchange.

 

Criteria Variation

We applied a variation under our Corporate Rating Criteria by using multiple-based lease-adjusted credit metrics to assess ABM’s rating instead of unadjusted ratios, as defined in the criteria, to better reflect ABM’s financial profile, given its strategy of using operating leases for core assets in its mining contracting business.

 

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg

Source: https://www.fitchratings.com/research/corporate-finance/fitch-affirms-abm-investama-at-b-outlook-stable-29-08-2022