Dec 18, 2011

Fitch affirms BUMA rating at BB-

Fitch Ratings has affirmed PT Bukit Makmur Mandiri Utama's (BUMA) long-term foreign-currency issuer default rating at BB- and national long-term rating at AA-(idn). The outlook remains stable. 
BUMA's ratings reflect its position as the second-largest coal mining contractor in Indonesia, with an estimated market share of 17%, reciprocal established relationships with some of Indonesia's largest coal producers, and the visibility of its revenues. 
Indonesia's mining contractors benefit from substantial ongoing coal production capacity increases, as about 80% of domestic coal mining and over-burden removal is contracted out to mining contractors. 
Fitch expects BUMA's overburden removal volumes to increase by 20% in 2012 to 400 million bank cubic meter (bcm).
BUMA's ratings, however are constrained by indirect exposure to commodity cycles, and by the highly capital intensive nature of its operations. 
Although long term contracts for work provide a fair degree of earnings visibility, its volume of work can be affected by a sustained downturn in the coal mining industry. 
Furthermore, despite its capex being very granular, the long lead times for equipment purchases, typically ranging from six months to two years, reduces flexibility in relation to capex. 
Strong industry growth prospects have necessitated BUMA to incur substantial expansionary capex in 2011 in order to maintain its market position. 
Following a change of ownership in 2009, BUMA's new management has taken steps to improve efficiencies, partly by intensifying capex on enhancing its equipment fleet. 
This has resulted in BUMA's capex to be higher through 2012, than Fitch's initial capex expectations. 
The company's EBITDA margins (excluding fuels costs, which are a pass through) have also fallen, to 35% in the nine months to September 2011 (2010: 40%). This is partly due to one-off costs incurred during the period, such as an increase in staff in preparation for a ramp-up of production, and new maintenance contracts for its equipment. 
As such, financial leverage, as measured by debt net of cash to EBITDA, weakened to 3.6x at September 2011 (2010: 2.9x). 
However, the stable outlook on BUMA's ratings reflect Fitch's expectation that, by 2013, its financial measures can improve to levels that are acceptable for its current ratings, when capex declines and its cash generation begins to benefit from higher investments in fleet over 2011-2012. 
BUMA's capex spend is expected to exceed its CFO in 2011 and 2012, which will lead to negative free cash generation thus requiring additional funding. As at end-October 2011 the company had access to about USD220m of, mostly, vendor financing credit lines; BUMA's liquidity profile benefits from cash reserves of US$42 million. 
In addition a substantial portion of the US$140 million raised via the recent rights issue of its parent, PT Delta Dunia Makmur Utama Tbk (DOID), is expected to fund BUMA's capex. 
Covenants imposed by BUMA's main banking line restrict its cash dividend payment to US$10 million per annum until the maturity of the loan in 2018.
Fitch may take a negative rating action if total net debt/EBITDA does not fall below 2.5x post-2012 due to sustained high capex, sustained weakening of margins from an inability to pass-through cost increases, and a failure to retain market share and volumes. The agency does not expect a positive rating action in the short- to medium-term. 

Disclosure: No position at the stock mentioned above.

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