Moody's to Revise Gajah Tunggal's Outlook to Negative
The Ground Breaking of IGM Manufacturing Plant in Tangerang (01/08) - Photo by GT-Tires

JAKARTA (TheInsiderStories)Moody’s Investors Service has changed to negative from stable the outlook on the ratings of Gajah Tunggal Tbk (IDX:GJTL). At the same time, Moody’s has affirmed the B2 corporate family rating of GJTL as well as the B2 rating on GJTL’s US$250 million senior secured notes due August 2022.

“The negative outlook reflects our expectation that GJTL’s credit profile will remain weak for its B2 ratings over the next 12-18 months, as its largely unmitigated exposure to volatile raw material input costs and currency exchange rates in Indonesia will continue to weigh on its margins,” said Moody’s Vice President and Senior Credit Officer Brian Grieser on Wednesday (04/10).

GJTL’s leverage – as measured by debt (EBITDA) – has breached the downward rating trigger of 4.5 times for its B2 ratings. Adjusted leverage increased to 5.1 times in 2018 from 4.8 times in 2017, due to lower earnings on the back of a weaker Rupiah and a sharp rise in carbon black prices in 2018.

While the Southeast Asia’s largest integrated tire manufacturer reports and earns most of its revenue in Rupiah, almost all of its raw material costs and debt obligations are denominated or linked to US dollar.

Solid revenue growth, both domestically and via exports, have yet to fully mitigate the pressure on margins driven by a weaker Rupiah and higher commodity prices in 2018. As a result, EBITDA margins have fallen to 12.5 percent, the lowest level in the last five years.

It said that lower carbon black prices, manageable natural and synthetic rubber prices, and the strengthening of the Rupiah versus 2018 highs should support margin improvement in 2019.

“We expect cash flows to be somewhat stronger in 2019 as investments in working capital subside. However, we expect substantially all cash flows to be used to fund debt service requirements and capital spending, leaving little buffer in the event of further raw material cost or currency volatility,” said Grieser, who is Moody’s lead analyst for GJTL.

The company has large debt amortization payments of $12.5 million each quarter under its syndicated bank loan, which will step up to $15.6 million each quarter from July 2020 onwards.

Moody’s expects GJTL will continue to rely on short-term working capital facilities in 2019. The ratings underpin Moody’s expectations that GJTL will successfully extend working capital facilities, which mature in August 2019.

Nonetheless, the affirmation of GJTL’s B2 ratings continues to reflect the company’s: first, leading market position in the Indonesian bias and motorcycle replacement tire market; second, balanced product mix among radial, bias and motorcycle tires; and third, solid geographic diversification of sales.

A downgrade would likely occur if EBITDA margins remain below 15 percent in 2019 owing to increased raw material, transportation and logistics costs, weaker currency, or if EBITDA remains over 4.5 times.

Further, deterioration in liquidity, either due to declining cash balances, failure to meet covenant requirements, or an inability to renew its short-term working capital facilities in a timely manner would also lead to a downgrade.

The ratings are unlikely to be upgraded in the near term given the negative outlook. However, the outlook on the ratings could return to stable if GJTL continues to grow its revenue base while maintaining its EBITDA margin around 15 percent, generating positive free cash flow and reducing debt levels. Further, a return of the outlook to stable would require GJTL to maintain its EBITDA below 4.5 times.

As inform, GJTL to produce 55,000 passenger car radial (PCR) tires, 14,500 bias tires, 95,000 motorcycle tires, and 2,000 truck and bus radial (TBR) tires per day. The company also has capacity to produce 40,000 tons and 75,000 tons of tire cord and synthetic rubber per year, respectively, for both internal consumption and third-party sales.

Written by Daniel Deha, Email: daniel@theinsiderstories.com