Moody's Investors Service has today assigned a B3 corporate family rating to PT ALUCO. The rating outlook is stable. This is the first time Moody's has assigned a rating to ALUCO.
The rating reflects its position as the leading cable manufacturer in Indonesia, through its 79.5% subsidiary PT Tranka Kabel, despite its relatively small scale.
"The company's long-term relationship with Indonesia's state-owned power utility, PT Perusahaan Listrik Negara's [PLN; Ba1/stable] and its vertically integrated operations -- which results in operating efficiency and an ability to manufacture a diverse range of low to high voltage over- and underground cables -- enable the company to capture expected growth in demand for transmission and distribution cables arising from higher domestic electricity demand," said Alvin Tan, a Moody's analyst.
ALUCO's ability to pass on price fluctuations to customers minimizes its exposure to commodity price risk. Accordingly, it has achieved a consistent track record of profitability, with EBITDA margins ranging from 7% to 15% over the past three years.
ALUCO's key challenge includes its sizeable working capital requirements, which constrain its capacity utilization and organic growth potential.
"The increase in aluminum and copper prices over the years has led to significant working capital needs, which in turn resulted in low capacity utilization of its cable facilities of between 49% and 59.3% over the past five years," said Tan, who is also Moody's Lead Analyst for ALUCO. The company has consistently generated positive fund from operations (FFO) over the past five years.
However, operating cash flows, after working capital changes, have been negative until 2010, due mainly to increasing metal prices, production expansion, and delays in customer payments during the recent global financial crisis. As such, the company relies on working capital lines to fund its ongoing operations.
Moody's expects working capital requirements to remain high over the next two years, as the company continues to expand production, leading to negative operating cash flows.
ALUCO's operations are also characterized by high customer concentration, with PLN and related contractors accounting for around 47% of the company's FY2010 revenue.
During the recent global financial crisis in 2008-2009, PLN delayed payments to its contractors and suppliers as a result of delays in its projects, which negatively impacted ALUCO's working capital.
Its private ownership status also leads to concerns over limitations to both corporate governance and transparency. However, Moody's takes comfort from the recent track record, whereby shareholders have never paid a dividend and injected funds into the business in support of long term growth.
The stable outlook incorporates Moody's expectation that ALUCO will be able to manage aluminum and copper price volatility within their working capital constraints and will also be able to increase capacity utilization and expand production as planned.
Established in 2003, ALUCO, a private company, is a leading manufacturer of cable in Indonesia, with an installed capacity of 110,000 metric tonnes per annum.
The company specializes in high voltage transmission cables, medium voltage transmission and distribution cables, as well as special conductors. For 2010, the company reported revenues of approximately US$366 million.
Disclosure: No position at the stock mentioned above.
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