JAKARTA (TheInsiderStories) – Moody’s Investors Service changed the rating
outlook on Steel Pipe Industry of Indonesia Tbk (P.T.)’s (Spindo) to
negative from stable. At the same time, Moody’s affirmed Spindo’s B2 corporate family rating (CFR).
“The change in outlook to negative reflects Moody’s expectation that Spindo’s gross margin will remain under pressure due to steel price volatility over the next 12-18 months, resulting in elevated leverage and weak interest coverage,” says Brian Grieser, a Moody’s Vice President and Senior Credit Officer.
As steel accounts for 85%-95% of its cost of goods sold, Spindo is exposed to fluctuations in global and domestic steel prices. Although the company uses a cost plus pricing model, it has been unable to fully pass on the increase in steel prices to its customers on a timely basis. As a result, Spindo’s gross margins have fallen to 15% for the 12 months ended 30 June 2018 from 18% in 2017 and 25% in 2016.
While Moody’s expects the company’s gross margins to stabilize around 15%
over the next 12-18 months as the company revises its selling prices to recover the higher steel costs, leverage – as measured by adjusted debt/EBITDA – will remain in 5.5x-6.5x range which is high for its B2 rating.
“Moreover, Spindo’s debt levels are elevated due to its high working capital investment needs and reliance on short-term funding,” adds Grieser, who is also Moody’s Lead Analyst for Spindo.
Spindo maintains a large inventory balance, because around 65% of its raw
materials are imported in bulk and half of its pipes are built-to-stock. While the company has been actively managing inventory levels down since Q3 2017, inventory days were still high at 265 days as of 30 June 2018.
Moody’s expects Spindo to manage down its inventory levels over the next
12-18 months, as it shifts more of its raw material purchases to local suppliers, which should generate some cash flows to allow for marginal
In addition, Moody’s anticipates that capital expenditures will remain
low in 2018 and 2019, alleviating any additional pressure on cash flow
generation. Capital expenditures will be allocated largely to the construction of warehouses to expand Spindo’s direct sales reach in Indonesia (Baa2 stable).
Spindo’s liquidity position is weak, as 70% of the company’s total debt –
or IDR2.2 trillion – comes due in the next 12 months. Nonetheless, the
company has a track record of rolling over its short-term working capital
facilities. In addition, the facilities are secured by inventories and receivables which amounted to IDR 2.8 trillion and IDR754 billion, respectively, as of 30 June 2018, providing a 1.6x coverage over short-term debt.
Given the negative rating outlook, Spindo’s CFR is unlikely to be upgraded over the next 12-18 months. However, the outlook could return to stable if the company manages to stabilize EBITDA margins in the mid-to-high teens, while also improving inventory turnover levels.
On the other hand, the ratings could be downgraded if margins fail to
stabilize or improve, inventory turnover levels weaken from current levels and/or short-term borrowings exceed inventory levels. In addition, reduced financial flexibility as a result of weaker operating performance could also lead to a downgrade.
Metrics indicative of downward rating pressure include (1) leverage level
in excess of 5.0x over an extended period; and/or (2) short-term borrowings to inventories in excess of 1.0x.
Steel Pipe Industry of Indonesia Tbk (P.T.) (Spindo) is a leading steel
pipe manufacturer in Indonesia, producing a variety of customized and
standardized carbon and stainless steel pipes and pipe-related products
Spindo’s products are used by customers in the construction, infrastructure, utilities, oil and gas, furniture and automotive industries, and are sold under the Spindo and Tetsura brands. Spindo operates six manufacturing facilities in Indonesia, with a total of 37 steel pipe production lines.
The company listed on the Indonesia Stock Exchange in February 2013. It
is 55.94%-owned by PT. Cakra Bhakti Para Putra (unrated) and 44.06% owned by public shareholders.