JAKARTA (TheInsiderStories) – Moody’s Investors Service has revised ABM Investama Tbk (P.T.)’s ratings outlook to negative from stable. At the same time, Moody’s has affirmed the company’s Ba3 corporate family rating and the Ba3 senior unsecured rating on its US$350 million notes due 2022.
“The change in ABM’s ratings outlook to negative reflects mounting
operational difficulties in its core businesses which has been evidenced by materially weaker-than-expected earnings growth over recent quarters,” says Maisam Hasnain, a Moody’s Analyst.
“We expect that earnings growth will continue to trend weaker than expected over the course of 2019, based on the company’s current trajectory and our expectations for coal prices. This will lead to weaker credit metrics for the ratings,” adds Hasnain, also Moody’s lead analyst for the company.
This is primarily because of: (1) increase in operating costs and
slightly lower overburden removal volumes at its mining services
business, and (2) lower production and higher mining costs at its largest mine, PT Tunas Inti Abadi (TIA), which is nearing the end of its reserve life.
As a result of these challenges, ABM‘s adjusted EBITDA, excluding its unrestricted power subsidiaries, has increased only slightly to around $150 million for the 12 months ended 30 June 2018 from around $140 million in 2016 despite a considerable increase in benchmark Newcastle thermal coal prices during this period.
To counter the lower production at TIA, ABM plans to ramp up volumes at its 70 percent-owned mining subsidiary, PT Mifa Bersaudara (MIFA), to 10 million tons a year from the five million tons expected in 2018.
However, at 3,400 kcal/kg, MIFA sells lower calorific value coal than TIA’s 4,200 kcal/kg, and generates lower cash profit. MIFA also has a shorter track record of ramping up production and consequently will raise the potential for increased execution risk.
In addition, Moody’s notes that based on current production levels, TIA reserves will be depleted by 2021, prior to the maturity of ABM’s $350 million bond due August 2022.
“ABM remains committed to acquiring a majority stake in a mine with similar coal quality and location to TIA by the end of this year, though details of potential targets remain uncertain. The ratings could be further pressured should this process prove to be protracted and replacement of dwindling reserve life be delayed from our expectations,” adds Hasnain.
Despite the challenges that the company faces, ABM’s Ba3 corporate family rating continues to reflect its track record of maintaining stable performance through the cycle, supported by its integrated operations.
ABM’s subsidiaries are involved across multiple stages of the coal supply chain, and the group benefits from synergies through the ownership of the supply chain from pit to port.
The negative ratings outlook reflects ABM’s weakening business profile and operational challenges at its core operations, as the coal reserve life at its TIA mine continues to decline, and as the uncertainty continues over ABM’s ability to acquire suitable coal assets to increase production and extend its limited mine reserve life.
Upward ratings pressure is unlikely, given the negative ratings outlook. Nevertheless, the outlook could revert to stable if ABM revives operations to improve earnings and cash flows, and increases its reserve life, while maintaining prudent financial policies.
Credit metrics — excluding unrestricted subsidiaries — indicative of a change in the ratings outlook to stable include adjusted debt/EBITDA below 3.5x and adjusted EBIT/interest above 2.0x on a sustained basis.
On the other hand, Moody’s could downgrade the ratings if: (1) the
company is unable to rectify its operational challenges/fails to improve consolidated earnings and cash flow; or (2) ABM fails to extend its mine life in the near term and/or increase its coal production volumes; or (3) there is evidence of cash leakage to its unrestricted power subsidiaries.
Specific quantitative indicators Moody’s may consider in downgrading the ratings include adjusted debt/EBITDA above 3.5x and adjusted EBIT/interest below 2.0x.
Listed on the Indonesian stock exchange since 2011, ABM Investama Tbk (P.T.) is an integrated energy company with investments in coal mining, mining services, engineering and logistics, and power generation.
The Hamami family controls 78 percent of ABM through PT Tiara Margo Trakindo (23 percent) and Valle Verde PTE LTD (55 percent). The remaining shares are held by the public.
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