Fitch Revises Outlook on Bukit Makmur Mandiri Utama to Stable; Affirms at 'BB-'

(Fitch Ratings - Singapore - 19 Jan 2022)--Fitch Ratings has revised the Outlook on PT Bukit Makmur Mandiri Utama (BUMA) to Stable from Negative and affirmed the Long-Term Foreign-Currency Issuer Default Rating and the ratings on its USD400 million 7.75% notes due 2026 at 'BB-'.

The Outlook revision reflects Fitch's expectation that BUMA would be able to reduce its FFO net leverage below its negative sensitivity in 2022, driven by higher overburden removal volume and lower capex. The Stable Outlook also reflects Fitch's expectation that BUMA will succeed in addressing its contract renewal risk, and maintain business continuity.

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

Key Rating Drivers

Overburden Removal Volume to Rise: We expect BUMA's overburden removal volume to rise to about 380 million bank cubic metres (mbcm) in 2022 from 325mbcm in 2021, and remain close to that level till 2025. We expect BUMA to start operating close to its target annual run rate of 70mbcm at PT Adaro Indonesia's (BBB-/Stable) Tutupan mine by 1Q22. Volume ramp-up at this new contract was slightly delayed due to higher-than-expected rainfall in 2H21, but BUMA has now finished most of the required work and will begin work at full capacity soon.

We also expect continued volume expansion by BUMA's other main customer, PT Bayan Resources Tbk (BB-/Stable). We forecast growth at Bayan to offset the volume lost when Adaro's older contract for its Paringin mine ends in 2022 with the depletion of its reserves. This will keep overburden removal volumes flat at about 370mbcm-390mbcm over 2023-2025.

Policy Risk: Risks from policy uncertainties for Indonesian coal companies remain, but we believe the risks will be manageable in the absence of any material changes to current regulations. We will treat any major change to regulations as event risk.

Lower Capex: Fitch expects BUMA's capex to remain modest from 2022, limited to only maintenance capex, which would support deleveraging. We expect BUMA's capex at USD75 million-125 million a year over the next four years. BUMA spent close to USD350 million in 2021 to support the expected volume growth from its customers, mainly Adaro and Bayan. With this, BUMA's equipment capacity should be sufficient to support volumes from all existing contracts, without any major growth capex till 2025.

BUMA expects its next equipment-replacement cycle in 2025-2026, but the amount will depend on the volumes from the contracts on hand at that point.

Improved Rating Headroom: We forecast BUMA's FFO net leverage at around our negative rating sensitivity of 3.3x in 2022, driven by higher volume and lower capex. Rating headroom should widen in 2023 with leverage falling to around 2.8x, despite the expected fall in coal prices, in line with Fitch's coal-price deck. About 60% of BUMA's volumes will be linked to coal prices from 2022, down from about 70% now, after it signed more fixed-priced contracts. This will mitigate the impact of lower coal prices on the average coal-contracting rates.

Contract Renewal Risk: BUMA's contract with its largest customer PT Berau Coal Energy, is expiring in 2025 along with the depletion of its Lati mine. We believe BUMA will be more selective in choosing new customers after facing some payment issues with some newer, smaller customers in 2017-2019. BUMA's new contracts with Adaro and Bayan show its competitive advantages in bidding for larger projects from its leading market position, proven operational track record, and ability to operate bigger and more complex mining projects.

Customer Concentration: Berau, Adaro and PT Indonesia Pratama, a subsidiary of Bayan, accounted for about 80% of BUMA's 2021 volumes. About half of BUMA's revenue is from Berau, with the portion increasing until BUMA signs new contracts to diversify its customer base. We believe the risk associated with customer concentration is mitigated by BUMA's long relationships with key customers and high contract renewal rates. Coal miners also generally prioritise payments to mining contractors to ensure the continuity of operations.

Neutral Impact from Downer Acquisition: BUMA's acquisition of the coal contracting assets of Australia's Downer EDI Limited (BBB/Stable) will improve BUMA's business profile by increasing geographical diversification, but the assets are in the same industry, so the overall impact on BUMA's credit profile is neutral. However, we think the transaction signals BUMA's openness towards acquisitions after changes in its shareholding structure. Fitch will monitor BUMA's growth plans. A shift towards more aggressive financial policies could result in a rating downgrade.

Derivation Summary

BUMA's closest rated peers are Indonesia-based PT ABM Investama Tbk (B+/Stable) and Australia-based mining equipment rental company Emeco Holdings Limited (B+/Stable).

BUMA is rated one notch above ABM due to its stronger business profile, driven by a better mine-contracting business in terms of efficiency, with higher margins, better customer profile and higher market share. BUMA also has a larger scale than ABM and operates at larger mines. Scale is an important consideration in this industry as larger coal miners typically have better ability to sustain operations through market downturns. ABM, however, benefits from its diversified business, although the improvement in its mining-contract business was offset by weakness in its coal-mining business due to low prices.

BUMA has better revenue visibility than Emeco, and a more stable operating profile 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 better than 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 increase by over 16% in 2022, followed by a rise of 1%-2% in 2023-2024. Volume to decrease by 5% in 2025

- Blended mining rates to fall by 8%, 3% and 2% in 2022, 2023 and 2024, respectively, as we expect coal prices to decline in line with Fitch's coal-price deck. The rate assumptions are about 10% lower in 2022 an 5% lower in 2023 and thereafter, as compared to management guidance.

- Costs of goods sold to remain close to USD 1.4/bcm through the forecast period.

- Capex of USD150 million in 2022 and USD75 million a year in 2023-2025.

- No dividend payouts through to 2025.

- For the acquired Downer assets: revenue of USD300- 330 million in 2022 to 2025; EBITDA of USD57 million in 2022 and USD50 million in the years after; and capex of USD10 million-25 million per year in line with management guidance.

RATING SENSITIVITIES

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

-An upgrade is unlikely over the short term, although a material improvement in BUMA's business diversification beyond coal-related operations, while maintaining an appropriate financial profile, may lead to an upgrade.

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

- Weakening market position, including weak execution of its business strategy, and failure to obtain new customers to replace expiring contracts

- 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

Comfortable Liquidity: BUMA's liquidity remains quite comfortable over the next two years with no refinancing requirements driven by its back-ended debt maturity profile. We expect BUMA's internal cash flow to be sufficient to repay its senior secured loan, which has a step-up amortising repayment structure and minimal repayment requirements till 2024.

BUMA's next major refinancing requirement would be in 2026 when its USD400 million senior unsecured bond and the remaining USD125 million of the secured loan are due. A major chunk of BUMA's contracts end in or around 2025, so we believe the company would need to replace the earnings stream with new contracts or other acquisitions to fulfil these medium-term refinancing requirements.

Issuer Profile

BUMA is a subsidiary of PT Delta Dunia Makmur Tbk. It provides coal mining services and carries out mining-related works, such overburden removal, coal mining, coal hauling, reclamation and land rehabilitation. BUMA serves seven customers with all the sites in Kalimantan in Indonesia.

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. (ends)