Moody's affirms United Tractors' rating; outlook remains stable

(Singapore, May 28, 2020)--Moody's Investors Service has affirmed United Tractors Tbk (PT)'s Baa2 issuer rating.

The outlook remains stable.

RATINGS RATIONALE

"The rating affirmation reflects United Tractors' strong balance sheet, leading market positions in Indonesia for its mining services and heavy equipment businesses, and its excellent liquidity profile, which will soften the impact of coronavirus-led disruptions and weak coal prices," says Stephanie Cheong, a Moody's analyst.

"United Tractors' long-term commitment to conservative and transparent financial policies, and minimal reliance on external debt provide significant cushion for the weaker earnings and cash flows expected in 2020," adds Cheong.

The company has maintained adjusted leverage, as measured by debt-to-EBITDA, below 1.5x over the last 15 years. At 31 March 2020, adjusted leverage stood at 1.1x, with cash balances in excess of reported debt.

Nevertheless, the decline in coal prices will weigh on revenues and earnings at United Tractors' mining services and coal mining businesses. At the same time, demand for its mining and construction equipment will continue to trend weakly as mining companies put off plans for capital expenditure and construction activity gets suspended or delayed due to the coronavirus outbreak.

While the company's gold mining and construction businesses are not meaningfully exposed to the coal sector, they are nonetheless vulnerable to coronavirus-related operational disruptions and weakening macro conditions.

Under Moody's base case assumptions, the company's adjusted debt/EBITDA will weaken significantly to around 1.6x in 2020 from 1.1x at 31 March 2020, but remain within the Baa2 rating thresholds of 2.0x. Moody's expects a normalization of thermal coal demand and prices will support a moderation of United Tractors' credit metrics in 2021, although the pace and timing of an improvement towards historical levels is less certain.

Moody's also expects United Tractors to maintain its excellent liquidity position, supported by (1) cash on hand of around IDR17.1 trillion ($1.1 billion); (2) a fully undrawn $300 million revolving loan facility due October 2023; (3) a fully undrawn $400 million club loan maturing November 2021; and (4) modest free cash flow generation expected through the next 12-18 months.

Liquidity is further supported by the company's cash containment measures during the pandemic, including a 40% reduction in planned capital expenditure for 2020 to IDR4.0 trillion.

Aside from amortization payments of IDR2.4 trillion ($162 million) annually under its $700 million term loan, the nearest debt maturity is a $200 million revolving credit facility which will come due in March 2022.

United Tractors' rating continues to incorporate a one-notch uplift from its parent Astra International, reflecting the likelihood of its parent providing credit support in the event of distress.

The ratings also take into account the following environmental, social and governance (ESG) factors.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

United Tractors faces elevated environmental risks associated with the coal mining industry, including carbon transition risk as countries seek to reduce their reliance on coal power. This risk is somewhat mitigated because United Tractors' customers supply coal primarily to Asia, where coal will remain a major power source because of significant existing capacity and the continued growth in power demand.

United Tractors is also exposed to social risks associated with the coal mining industry, including health and safety, responsible production and societal trends. The company has implemented occupational health and safety guidelines and monitors the implementation of these standards. The company also engages in a number of social initiatives such as community development projects, including education and health care funding, infrastructure development and economic support for the locals where its operations are located.

In terms of governance considerations, the rating factors in United Tractors' long track record of conservative financial policies and continued discipline in capital investments, shareholder returns and liability management.

The stable outlook reflects Moody's expectation that United Tractors' credit metrics will be maintained at levels that are appropriate for its rating and that the company will maintain significant liquidity.

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

A rating upgrade is unlikely, owing to sovereign constraints stemming from United Tractors' domestic focus and its high correlation with macroeconomic conditions in Indonesia.

Moody's could downgrade the rating if United Tractors takes a more aggressive approach to its financial policies, for example through debt-financed acquisitions or investments, causing debt/EBITDA to rise above 2.0x for an extended period, with cash balances falling below $500 million.

Moody's could also downgrade the rating if the company's adjusted EBITA margin falls below 15% for a sustained period.

Finally, Moody's could also downgrade the rating if there are signs that Astra is no longer willing or able to support United Tractors, resulting in the one-notch rating uplift for parental support being removed.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/research/Business-and-Consumer-Service-Industry--PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

United Tractors Tbk (PT) is a distributor of heavy equipment to the mining, construction, forestry and agriculture sectors, and a provider of mining contracting services to the coal sector in Indonesia. The company has three other segments focused on domestic coal production, gold mining and industrial and commercial construction.

United Tractors is 59.5% owned by Astra International Tbk (PT). The remaining 40.5% share of the company is publicly traded on the Indonesia Stock Exchange. (ends)