Photo: Wijaya Karya

Singapore — Moody’s Investors Service has assigned a first-time Ba2 corporate family rating (CFR) to Wijaya Karya (Persero) Tbk. (P.T.) (WIKA). The rating outlook is stable.

RATINGS RATIONALE

As a government-related issuer (GRI), WIKA’s rating reflects a combination of (1) its b1 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 (Baa3 positive).

“WIKA’s standalone credit profile reflects 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,” says Maisam Hasnain, a Moody’s Analyst.

WIKA’s order book increased to IDR94.4 trillion in September 2017 from
IDR38.3 trillion in 2013. Based on revenues of IDR22.2 trillion for the 12 months to September 2017, this represents an order book to revenue ratio of around 4.3x, up from 3.2x in 2013. Moody’s expects WIKA’s order book to revenue ratio to remain around 4.0x through 2019 on the back of strong infrastructure investment in the country.

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 earnings volatility, and supports
the company’s credit profile.

The rating also reflects Moody’s view that WIKA will benefit from the Indonesian government’s initiatives to accelerate infrastructure development in the country. Infrastructure spending allocation to the state budget has increased to 18.6% in 2017 from 8.7% in 2014. The 2018 state budget also calls for a 6% year-on-year increase in infrastructure spending to around IDR410 trillion.

However, WIKA’s standalone credit strength is constrained by the inherent
cyclicality in the construction industry. In addition, 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 constitute around 29% of WIKA’s order book as of September 2017. As such, project delays or cost overruns could adversely impact WIKA’s credit profile.

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 investment costs associated with some of these projects.

For example, WIKA’s leverage — as measured by adjusted debt to EBITDA —
increased to around 3.4x as of September 2017 from 1.7x in 2013, while its order book increased to IDR94 trillion from IDR38 trillion over the same period. In addition, the company has generated negative cash from operations since 2016, given its sizeable working capital requirements.

Moody’s expects WIKA to maintain sizeable capital expenditure and
elevated investment needs over the next two years as it executes its
large projects. As such, Moody’s expects WIKA’s leverage will increase
moderately to around 4.0x through 2019, while continuing to generate
negative free cash flow.

“Our expectation of support from the Indonesian government for WIKA stems
from the close supervision over WIKA’s operations and budget, and WIKA’s
strategic role in achieving Indonesia’s infrastructure development objectives,” adds Hasnain, also Moody’s lead analyst for WIKA.

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.

The rating outlook is stable, reflecting Moody’s expectation that WIKA
will maintain its leading market position, with strong project execution
capabilities. It also reflects Moody’s expectation that the company’s
operating performance will remain supported by its sizeable order book.

A rating upgrade is unlikely over the next 12-18 months given WIKA’s
size-able capital expenditure and investment requirements.

Over the longer term, positive momentum on its BCA could build 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. However, an improvement in the BCA or
upgrade to the sovereign rating will not automatically result in an
upgrade of WIKA’s rating.

Alternatively, WIKA’s ratings could face downward pressure if: (1) itbids 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 delays in its projects.

Credit metrics indicative of downward rating pressure include (1) adjusted
debt/EBITDA above 5.0x; and (2) adjusted EBITA/interest expense below
2.0x on a sustained basis.

While unlikely given the positive outlook, a downgrade to the Indonesian
sovereign rating would result in a downgrade to WIKA’s rating. Furthermore, a reduction in the 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 EPC companies in Indonesia with revenues of around IDR22.2
trillion for the 12 months to September 2017, and an order book of
IDR94.4 trillion as of September 2017.

Listed on the Indonesian Stock Exchange since 2007, WIKA is 65% owned by
the Government of Indonesia (Baa3 positive), with the remaining 35% shares held by the public.

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