May 8, 2012

S&P revises Gajah Tunggal outlook to positive

Standard & Poor's Ratings Services (S&P) today revised its outlook on Indonesia-based tire manufacturer PT Gajah Tunggal Tbk (GJTL) to positive from stable. 
At the same time, S&P affirmed the B corporate credit rating on the company. The rating agency also affirmed the B issue rating on Gajah Tunggal's guaranteed secured notes.

"The positive outlook reflects our view that Gajah Tunggal's financial risk profile will likely strengthen to "aggressive" over the next 12 month-18 months, from "highly leveraged" currently," said Standard & Poor's credit analyst Xavier Jean. "We expect moderate revenue growth and softening raw material prices to support the company's cash flows and improve its leverage."
The rating agency projected Gajah Tunggal's ratio of total debt to EBITDA to gradually decline to less than 2.5x in 2013, from about 3.1x in 2012, in our base-case scenario. 
S&P also expected the company's ratio of total debt to total debt plus equity to decline to about 45% in 2013, from about 51% in 2011. 
These projections are based on the following assumptions of revenue growth of 6% in 2012 and 7% in 2013 and EBITDA margin of 12%-13% over the next two years.
"We expect that Gajah Tunggal's cash flows will improve in 2012 and 2013, with funds from operations of Indonesian rupiah Rp1,100 billion-Rp1,200 billion, and that the company's free operating cash flows will be positive over the period. We view Gajah Tunggal's liquidity as "adequate", as defined in our criteria. We expect the company's liquidity sources to exceed its liquidity uses by about 1.4x in the next 12 months."
The rating on Gajah Tunggal reflects the company's "weak" business risk profile and a "highly leveraged" financial risk profile. 
The agency believed the company has an aggressive capital structure, and it is exposed to the cyclical and competitive tire manufacturing industry. 
"We also believe that its financial flexibility is limited. Gajah Tunggal's competitive cost position and leading share in the Indonesian tire market temper these weaknesses.
We could raise the rating by one notch if we believe Gajah Tunggal's total-debt-to-EBITDA ratio will stabilize at 2.5x-3.0x, with the ratio of FFO to total debt exceeding 20% and positive free operating cash flows," said Mr. Jean. 
An upgrade assumes that Gajah Tunggal does not engage in a more aggressive dividend distribution or related-party transactions with its 49.7% shareholder Denham Pte Ltd. that could weaken its own cash flows or leverage.
A downgrade seems less likely in the coming months given our expectation of Gajah Tunggal's operating performance.
However, S&P could revise the outlook to stable if: (1) intense price competition or rapidly increasing raw material prices result in revenue growth of less than 1% and a decline in EBITDA margin to below 10% such that Gajah Tunggal's total-debt-to-EBITDA ratio exceeds 3.5x; (2) the company's liquidity deteriorates quickly because of a rapid increase in working capital requirements or less favorable terms of trade with clients; or (3) capital spending significantly exceeds our expectation of Rp500 billion-Rp600 billion in 2012, resulting in a ratio of total debt to total debt plus equity of above 50% for a prolonged period.

Disclosure: No position at the stock mentioned above.

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