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JAKARTA (TheInsiderStories) – Fitch Ratings Indonesia has issued the ‘AA(idn)’ National Long-Term Rating on PT Mayora Indah Tbk’s (AA(idn)/Stable) Rp2 trillion bond program. At the same time, the agency has also assigned a ‘AA(idn)’ rating on the Rp550 billion of bonds issued under the program.

Mayora’s rating reflects its leading market position; strong brands across its food and beverage products; a diversified revenue base; low leverage; healthy liquidity and strong cash-flow generation. These factors help to offset Mayora’s smaller scale compared with similarly rated companies.

‘AA’ National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country’s highest rated issuers or obligations.

Key Rating Drivers 

Continued Revenue Growth: We expect Mayora’s revenue to increase in the high single digits in 2018 and 2019, supported by healthy volume growth and Mayora’s pricing power on the back of the company’s strong brands. Revenue in 2017 is likely to exceed Rp20 trillion (2016: Rp18.3 trillion), which would translate into yoy growth of more than 9%. Revenue in 4Q17 increased faster than in the preceding quarter, supported by growth in export sales to China ahead of the Lunar New Year festivities in February 2018. Revenue growth for the first three quarters of 2017 was mostly driven by domestic sales, which rose 11 per cent yoy while export sales only grew 3 per cent.

Diversified Revenue: Mayora’s rating benefits from diversification by product category and geography in its revenue sources. The diversifications will help the company weather downturns in any one market and strong competition in a particular product category. Export revenue accounted for around 42 per cent of total revenue in 3Q17 with domestic sales making up the rest. In addition, there is no single product category that contributes to more than 35 per cent of Mayora’s revenue.

Raw Material and Forex Risks: Fitch expects Mayora to maintain a stable EBITDA margin of around 13-14 per cent in 2018 and 2019 (3Q17: 13.1 per cent), comfortably higher than the 10 per cent at which we would consider negative rating action. EBITDA margin will be supported by the company’s reasonable ability to pass-on fluctuations in raw-material prices to customers. Changes to raw-material prices remain the key risk for Mayora as 55-60 per cent of its costs come from coffee, sugar and milk purchases.

There is also an element of forex risk as 20 per cent of raw-material purchases are denominated in US dollars. However, this is mitigated by the large contribution from exports to Mayora’s revenue.

Low Leverage Profile: Mayora’s leverage, as measured by net adjusted debt/EBITDAR, will remain comfortable at around 1.0x in 2018 and 2019. This will be supported by robust cash flows from operations, which will be adequate to cover around Rp800 billion of capex and the 30% dividend payout ratio.

Minimal Subordination of Noteholders: Mayora, on a standalone basis, generates nearly 50 per cent of total group EBITDA and holds around 70 per cent of the total group’s debt. We do not think holders of the notes will face significant structural subordination as all of Mayora’s key subsidiaries are more than 95 per cent owned and there are no restrictions on cash movement within the group. All of Mayora’s debts are unsecured in nature and we expect the ratio of total debt to EBITDA to remain below 1.5x at end-2017.

Derivation Summary 

Mayora can be compared with telecommunications tower company PT Tower Bersama Infrastructure Tbk (TBI, AA-(idn)/Stable). Both companies generate adequate positive pre-dividend FCF after capex. However, TBI funds its capex through bank debt and uses cash flow for its policy of large dividend payments and shares buybacks. TBI also faces much higher foreign-exchange risk, as most of its loans are denominated in US dollars but it generates little US dollar revenue. Mayora’s lower leverage, minimal currency risk and the absence of aggressive financial policy warrant a one-notch rating difference against TBI.

Key Assumptions

Fitch’s key assumptions within our rating case for the issuer include:
– 2-3 per cent annual volume growth across all product categories for domestic and export sales in 2018-2019.
– Advertising and promotion expenses account for around 11 per cent of revenue in 2018-2019 (2016: 9 per cent).
– Capex of around Rp800 billion in 2018-2019 (2016: Rp765 billion).
– 30 per cent dividend payout ratio in 2018-2019 (2016: 22 per cent)

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Positive rating action is not expected unless the company significantly improves its scale while maintaining a stable financial profile
Developments That May, Individually or Collectively, Lead to Negative Rating Action
-Increasing working-capital requirements or higher-than-expected capex that results in FCF turning negative for a sustained period:
-Net adjusted debt/EBITDAR rising above 1.5x for a sustained period
-Declining profitability, as measured by the EBITDA margin, falling below 10 per cent for a sustained period

Liquidity

Satisfactory Liquidity, Strong Funding Access: Mayora had Rp1.9 trillion of cash against Rp2.8 trillion of short-term debt maturities at end-September 2017. Of the total short-term debt, Rp2.2 trillion were short-term working capital facilities that can be rolled over. Mayora has strong access to funding as evidenced by various facilities from local and foreign banks and the company’s proven track record in tapping the local bond market. (*)

 

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