Moody's downgrades WIKA to Ba3; changes outlook to negative

(Singapore, June 23, 2020) -- Moody's Investors Service has downgraded the corporate family rating (CFR) and senior unsecured bond rating of Wijaya Karya (Persero) Tbk. (P.T.) (WIKA) to Ba3 from Ba2. At the same time, Moody's has changed the outlook on the ratings to negative from stable.

RATINGS RATIONALE

WIKA's Ba3 rating reflects the application of Moody's rating methodology for government-related issuers — published in February 2020 — that combines: (1) its b2 baseline credit assessment (BCA), and (2) a two-notch uplift based on Moody's expectation of a moderate level of extraordinary support from the Government of Indonesia (Baa2 stable) in times of need.

"WIKA's business has been severely impacted by the coronavirus pandemic, and we expect the supply chain disruptions and restrictions on construction work resulting from the lockdowns in Indonesia will delay the completion of all of WIKA's projects. Consequently, we expect its leverage to peak to 9.0x-10.0x in 2020 and remain elevated at about 5.8x-6.0x through 2022," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Furthermore, the strong growth in new contracts in recent years has corresponded with a weakening in WIKA's credit metrics given the large up-front investments associated with some of these projects. Moody's expects the company to generate negative cash from operations over 2020 and 2021 given its sizeable working capital requirements.

"The negative outlook reflects WIKA's elevated leverage and weak liquidity amid an uncertain operating environment due to the protracted coronavirus outbreak. The company will also need to refinance debt maturities of IDR5.6 trillion ($386 million) over the next six months, which include the Komodo bond maturing in January 2021," adds Dhruv, who is also Moody's Lead Analyst for WIKA.

Nonetheless as a government-owned and controlled company, Moody's expects WIKA will continue to have access to domestic state-owned banks.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The construction sector has been affected by the shock given its direct exposure to government containment and regulatory measures, and its sensitivity to consumer demand and sentiment.

Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Moody's rating action reflects the potential impact on WIKA of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

That said, WIKA's standalone credit profile continues to reflect its leading market position as one of the largest integrated construction companies in Indonesia with an established track record of completing large projects, and a strong order book which provides revenue and cash flow visibility over the next few years.

WIKA's order book declined to IDR80.2 trillion as of March 2020 (compared to IDR117 trillion in December 2019), and comprised mainly of backlog orders. Based on revenues for the 12 months to March 2020, this represents an order book to revenue ratio of around 3.2x, down from 3.6x in 2015. Moody's expects WIKA's order book to revenue ratio to remain around 3.5x-4.0x through 2021 and 2022 on the back of a pick-up in infrastructure investment as Indonesia emerges from coronavirus-led lockdowns.

WIKA has a diversified business profile with multiple revenue-generating segments focused on engineering, procurement and construction (EPC) for the civil & building infrastructure, energy & industrial, and property & realty sectors. WIKA also operates a segment producing construction materials such as pre-cast concrete. The operational diversity between the various business segments moderates its earnings volatility and supports the company's credit profile.

In addition, its earnings growth over the next two years will be driven by its three largest projects -- the Jakarta to Bandung High Speed Rail, Jakarta Light Rail Transit, and Balikpapan - Samarinda Toll Road -- which constituted around 27% of WIKA's order book as of March 2020. As such, project delays or cost overruns could adversely impact WIKA's credit profile.

Moody's expectation of support from the Indonesian government for WIKA stems from WIKA's role in achieving Indonesia's infrastructure development objectives as one of the four main state-owned construction companies. Such expectation of support remains appropriately reflected in the two notches of uplift.

The Indonesian government also holds a Series A Dwiwarna Share which provides it special rights, including the right to approve WIKA's board level personnel, corporate strategy and financial policy decisions.

ESG CONSIDERATIONS

In terms of environmental, social and governance (ESG) factors, WIKA's ratings reflect elevated social risks relating to its construction activities, including health and safety risk, and interactions with local communities.

Moody's has also considered governance risk stemming from concentrated ownership, because the Government of Indonesia -- through the Ministry of State Owned Enterprises -- owns 65.05% of the company, and also appoints the board of commissioners and directors.

Nonetheless, governance risk is partially mitigated by WIKA's listing on the Indonesian stock exchange since October 2007. The company refers to the country's prevailing laws and regulations which largely govern risk management, compliance and reporting, board structure, policies and procedures.

RATING OUTLOOK

The negative outlook reflects WIKA's elevated leverage and weak liquidity amid an uncertain operating environment due to the protracted coronavirus outbreak. The company will need to refinance significant debt maturities over the next six months.

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

An upgrade is unlikely, given the negative outlook. Nevertheless, the outlook could return to stable if WIKA successfully executes its business plan while maintaining a disciplined approach to investments, with a sustained improvement in its financial profile and a strong order book. An upgrade of the sovereign rating will not automatically result in an upgrade of WIKA's ratings.

Specific indicators that Moody's would consider for a stable outlook are (1) adjusted debt/EBITDA below 6.0x; and (2) adjusted EBITA/interest expense above 1.5x on a sustained basis. Refinancing of debt maturing over the next six months also needs to be addressed.

WIKA's ratings could be downgraded if (1) the company bids aggressively to win new contracts, resulting in a considerable deterioration in its financial profile; (2) it experiences a substantial decline in new contracts wins; or (3) it incurs large cost overruns and project delays; or (4) the company does not refinance its upcoming debt maturities in a timely manner.

Credit metrics indicative of a possible downgrade include (1) adjusted debt/EBITDA above 6.0x; and (2) adjusted EBITA/interest expense below 1.5x on a sustained basis.

In addition, a reduction in the Indonesian government's shareholding level or perceived support could lead to a negative rating action on WIKA.

Established in 1960, Wijaya Karya (Persero) Tbk. (P.T.) (WIKA) is one of the largest engineering, procurement and construction (EPC) companies in Indonesia with a revenue of IDR24.9 trillion for the 12 months ended March 2020 and an order book of IDR80.2 trillion as of March 2020.

WIKA was listed on the Indonesian Stock Exchange in 2007 and is 65% owned by the Government of Indonesia, with the remaining 35% of shares held by the public. However, the Indonesian government holds a Series A (Dwiwarna) share in WIKA. This Series A share grants it special rights, including setting corporate strategy and financial policy, and having a veto on board selection. (ends)