Fitch Affirms Bukit Makmur Mandiri Utama at 'BB-'; Outlook Negative

(Fitch Ratings - Singapore - 21 Jan 2021)-- Fitch Ratings has affirmed PT Bukit Makmur Mandiri Utama's (BUMA) Long-Term Foreign-Currency Issuer Default Rating (IDR) and the outstanding senior unsecured notes due 2022 at 'BB-'. The Outlook on the IDR is Negative.

The Negative Outlook continues to reflect BUMA's low rating headroom. Fitch expects the funds from operations (FFO) net leverage to remain near the negative rating sensitivity of 3.3x in 2021 - albeit lower than our expectation of 3.6x in 2020 - before improving to less than 2.5x from 2022. The improvement is based on our expectations of expanding volumes, higher realisations and better cost management.

BUMA's rating reflects its position as Indonesia's second-largest mining contractor, with a market share of about 15% and a satisfactory operational record with customers. The rating also reflects the concentration risk the company faces, with about 80% of its volume coming from only three counterparties, and the highly cyclical nature of the domestic coal contracting industry.

KEY RATING DRIVERS

Improving earnings: Fitch expects BUMA's EBITDAR to improve to over USD220 million in 2021 from about USD160 million in 2020 (USD267 million in 2019). The improvement factors in our expectations of volume growth, price improvements following our coal-price assumptions and BUMA's cost optimisations in 2020. About 70% of BUMA's coal-mining contracts are linked to coal prices and are affected by coal-price movements.

Cost Savings: Fitch also estimates costs to have fallen in 2020, after peaking in 2019, as the company optimises its capacity to match the lower volume base and improves operational efficiencies. BUMA has cut over 2,000 employees since end-2019. BUMA's employee cost fell to USD95 million in 9M20 (9M19: USD104 million); this includes one-time costs of USD7 million.

New Contracts Wins Key: Fitch thinks BUMA will increasingly rely on winning new customers in the next few years to maintain earnings. BUMA's PT Berau Coal contract, accounting for about half of BUMA's revenue, ends in 2025 when mine reserves are depleted. Fitch believes BUMA's strong reputation and 20-plus years of experience will help secure new business and manage the operational execution risks of new business. New contracts can also reduce BUMA's customer concentration - a key constraint for improving beyond 'BB-'over the medium term.

BUMA extended in 2021 its contract with a subsidiary of PT Bayan Resources, which would result in additional overburden volumes of around 650 million bank cubic metres (bcm) until 2031. This should offset the volumes lost from a contract with PT Kideco Jaya Agung that ended in 2020. Fitch expects BUMA to exercise financial prudence and be more selective in choosing new growth opportunities, after facing some payment issues with some newer albeit smaller customers in 2017-2019. Still, we would treat any major acquisitions as event risk.

Lower Capex: We expect equipment capacity to remain high, but with a minimal contribution to the cost base, as BUMA plans to park its spare equipment in line with its lower volume expectation. This will reduce repair and maintenance expenses, which we believe will lower capex requirements over the next three years. Fitch estimates capex in 2020 was limited to maintenance at USD30 million, and forecast maintenance and growth capex of around USD100 million a year over 2021-2023.

Strong Market Position: Fitch estimates BUMA's key customers - Berau Coal, PT Adaro Indonesia (BBB-/Stable) and PT Indonesia Pratama, a subsidiary of PT Bayan Resources Tbk (BB-/Stable) - contributed about 80% of BUMA's 2020 volume. They all have an efficient cost positions, and Berau Coal and Adaro have a more than 15-year relationship with BUMA. We expect BUMA to maintain its position as Indonesia's second-largest coal-mining contractor.

DERIVATION SUMMARY

BUMA's closest rated peers are PT ABM Investama Tbk (B+/Negative) and Emeco Holdings Limited (B+/Stable). BUMA's one-notch differential to ABM's rating is justified by its stronger business profile, driven by its better mine-contracting business in terms of efficiency, with higher margins and market share. BUMA also has a larger scale than ABM, in an industry where scale is important. ABM benefits from its diversified business, although the improvement in its mining-contractor business was offset by weakness in its coal-mining business in the low coal-price environment. BUMA's financial profile is also slightly stronger than that of ABM.

BUMA has better revenue visibility than Emeco, an Australia-based equipment-rental company, and a more stable business model that stems from its long-term contracts with miners and integration in the production stage. Emeco's financial profile has improved over the last few years and is now comparable with that of BUMA. However, BUMA benefits from the stickiness of its coal-mining contracts, unlike Emeco, underscoring the one-notch differential between the two ratings.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Volume to decline by over 20% in 2020, followed by a recovery of 19% in 2021 and 10% in 2022

- Blended mining rates fall by 6% in 2020, and recover by 5% in 2021. Rates remain constant after 2021, reflecting Fitch's coal-price assumptions of USD32.5 per tonne in 2021 and USD32 per tonne thereafter;

- Costs of goods sold to decline and remain at around USD1.23/bcm in from 2020 to 2023 (2019: USD1.38/bcm);

- Capex of USD30 million in 2020, USD100 million a year in 2021-2022 and USD110 million in 2023;

-No dividend payouts through to 2023.

RATING SENSITIVITIES

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

- Fitch does not expect positive rating action in the near-term due to the Negative Outlook on BUMA's IDR;

- The Outlook will be revised to Stable if BUMA is able to sustain credit metrics at levels stronger than our negative sensitivities from 2021. This would be driven by maintaining volume as it substitutes the declining volume from existing counterparties with new contracts.

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

- Weakening market position, including failure to retain major customers, as well as contract volume and cash flow generation falling short of Fitch's expectations, leading to deteriorating credit metrics;

- FFO net leverage sustained above 3.3x.

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

Refinancing to Tackle Tight Liquidity: BUMA's cash balance was USD146 million as of end-September 2020, and Fitch expects BUMA to require refinancing to meet the majority of debt maturities after factoring in the internal cash generation. Fitch expects BUMA to address its tightening liquidity in the short term as its USD350 million of notes are due by February 2022 and USD58 million of bank loans are due in November 2021.

The company does not have any undrawn, committed bank facilities; however, we expect BUMA to be able to secure bank credit facilities or access debt capital markets given BUMA's proven operational record. (ends)