S&P lifts Gajah Tunggal’s debt rating
Standard & Poor’s has upgraded Indonesian tyre maker PT Gajah Tunggal Tbk’s debt rating from ‘B’ to ‘B+’. Explaining its decision to do so, the financial services company observes that Gajah Tunggal’s competitive cost position and leading share in the Indonesian tyre market temper any weaknesses that may arise from the company’s “aggressive” capital structure, limited financial flexibility and the cyclical and cost competitive nature of the tyre industry.
Gajah Tunggal’s company debt-to-EBITDA ratio will decline to less than 3x in 2012, and to below 2.5x in 2013, under S&P’s base-case scenario. Gajah Tunggal’s debt-to-EBITDA ratio, at about 2.6x for the 12 months ended June 30, 2012, was better than the S&P expected, due to a better-than-anticipated improvement in EBITDA margin and higher revenue growth. EBITDA for the first half of 2012 was about 60 per cent of S&P’s full-year projection of Indonesian rupiah (IDR) 1.65 trillion. The financial services company expects Gajah Tunggal’s revenue growth to “moderate somewhat” in the second half of 2012.
“The full effect of Indonesia’s new regulation on down payments on cars and motorcycles purchased on credit will kick in from the third quarter,” commented Standard & Poor’s in a statement. “This could moderately weaken the volume of non-replacement tyres for the original equipment manufacturers market. Nevertheless, we believe the company’s margin will remain generally favourable given lower natural rubber prices. Recent reports suggest that large Southeast Asian rubber producers could curb supply. This may push up prices temporarily, but the generally weak global macroeconomic outlook will likely deter permanent and substantial increases in rubber prices over the next six to 12 months, in our view. Still, the sector’s improved profitability could trigger a more intense price competition to garner market share given domestic tyre manufacturers’ improved margins. Gajah Tunggal’s EBITDA margin increased to 15 per cent in the six months ended June 30, 2012, from 11 per cent in the same period of 2011.
“We still need a better understanding of Gajah Tunggal’s growth strategy for 2013-2015, and of how different funding options could affect the company’s leverage,” Standard & Poor’s continued. “Gajah Tunggal acquired a parcel of industrial land for about US$108 million in the second quarter of 2012. While high, the amount seems to reflect the current prices in the area. The company plans to increase its production of truck and bus radial tyres over the next three years.
Using Standard & Poor’s criteria, Gajah Tunggal’s liquidity is defined as “adequate.” The financial services company expects the tyre maker’s liquidity sources to exceed its liquidity uses by about 1.2x in the next 12 months. This liquidity assessment incorporates the following factors and assumptions: Sources of liquidity include S&P’s expectation of funds from operations (FFO) of IDR1.1 trillion-IDR1.2 trillion over the next 12 months and Gajah Tunggal’s cash balance of IDR677.2 billion as of June 30, 2012; the company also has about IDR181 billion in short-term investments, but S&P only considers 50 per cent of the value of these investments in its liquidity assessment to reflect their possible lack of marketability; S&P believes Gajah Tunggal’s 25.5 per cent stake in Jakarta stock exchange-listed PT Polychem Indonesia Tbk. (not rated) as of June 30, 2012, provides marginal additional support to the company’s liquidity; uses of liquidity include S&P’s expectation of working capital requirements of IDR250 billion-IDR300 billion and capital expenditure of about IDR500 billion-IDR600 billion; liquidity needs also include a repayment of about IDR180 billion of the initial outstanding principal amount on Gajah Tunggal’s 2009 restructured bond due by July 21, 2013, and IDR225 billion of accrued interest. The company repaid about US$11.5 million of the bond in July 2012; S&P also factors in about IDR50 billion of shareholder distribution over the next 12 months.
The positive outlook reflects Standard & Poor’s expectation that Gajah Tunggal’s financial risk profile will strengthen over the next 18 months. It expects the company’s cash flows to improve and its free operating cash flows to be positive over the period. S&P says it could further raise the tyre maker’s rating by one notch if it believes Gajah Tunggal’s ratio of total debt to EBITDA will stabilise at 2.5x-3x, with the ratio of FFO to total debt exceeding 20 per cent and positive free operating cash flows. This could happen if the company’s annual revenue grows more than eight per cent in 2012 and 2013, while its EBITDA margin remains above 12 per cent. The possibility of a downgrade seems less likely given S&P’s expectation of Gajah Tunggal’s operating performance.