July 17, 2017 / 9:11 AM / a year ago

Fitch Affirms Astra Otoparts at 'AA-(idn)'; Outlook Stable

(The following statement was released by the rating agency) JAKARTA, July 17 (Fitch) Fitch Ratings Indonesia has affirmed PT Astra Otoparts Tbk's (AUTO) National Long-Term Rating at 'AA-(idn)'. The Outlook is Stable. At the same time, the agency affirmed the company's IDR800 billion medium-term notes (MTN) at 'AA-(idn)'. AUTO's rating is underpinned by its robust business profile and solid credit metrics. It has a diverse range of products, strong brand image and earnings diversification from its expanding trading division, and maintains a healthy level of debt relative to earnings. The National Long-Term Rating includes a one-notch uplift due to its strong strategic and operational links with its 80% shareholder, PT Astra International Tbk (Astra), in line with Fitch's Parent and Subsidiary Linkage methodology. The company's MTN is rated at the same level as its National Long-Term Rating, as the notes constitute its senior unsecured obligations. 'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations. KEY RATING DRIVERS Market Leader; Resilient Income: AUTO is Indonesia's largest automotive-parts manufacturer by revenue and capacity, and its Shop & Drive chain is the largest auto-parts retailer, with 363 outlets. AUTO leads the market in several product categories, notably batteries and shock absorbers. It is both an original equipment manufacturer (OEM) and replacement equipment manufacturer (REM), a business model that provides some diversification, as REM demand is more resilient than that for OEM parts. Strong Trading Business, Manufacturing Recovering: The company's trading division has proved resilient amid challenges of automotive sales , with 2016 trading revenue increasing by 11% yoy, improving the division's contribution to total revenue to 46% in 2016 (2015: 45%, 2014: 41%). Manufacturing revenue also saw a stark improvement, increasing by 8% in 2016 after a 10% decline in 2015; this was in line with better automotive sector conditions. We expect support from the trading business to continue, with its contribution to total revenue increasing to 49% in 2019. Comfortable Leverage: The company paid off about IDR1.2 trillion in short-term loans after obtaining IDR800 billion through its MTN issuance, repaying the balance with internal cash. This improved its leverage metrics, with debt/EBITDA and FFO-adjusted leverage at less than 1x. The deleveraging was made possible by AUTO's lower capex in 201, significantly below 2013-2015 levels despite being 17% above our expectations, at IDR690 billion. This also resulted in positive free cash flow (FCF). Rating Factors in Parental Support: We believe strong operating and strategic linkages exist between AUTO and parent Astra, which underpin the one-notch uplift to AUTO's standalone 'A+(idn)' rating. The linkages include reputational risks from carrying the same brand name, significant overlap in board composition, and integration of AUTO's components in Astra's automotive business - spanning manufacturing, distribution and auto-financing activities. DERIVATION SUMMARY AUTO's standalone rating of 'A+(idn)' is well-positioned relative to peers such as PT Sri Rejeki Isman Tbk (Sritex, BB-/A+(idn)/Stable). Sritex' higher profitability leads to greater EBITDA and it operates in a more stable industry than AUTO, but these advantages are counterbalanced by its elevated leverage profile relative to that of AUTO. We believe a one-notch difference applies to AUTO's standalone profile against higher-rated peers, such as PT Sumber Alfaria Trijaya Tbk (Alfamart, 'AA-(idn)'/Stable). Alfamart has larger scale and stabilising same-store sales growth amid its expansion and leading position in the minimart business. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Gradual automotive sector recovery from 2017, with sales growth in manufacturing division revenues of around 2%-4% per year in 2017-2019 - Gross margin to range between 13%-13.5% in 2017-2019 - Capex of around IDR700-900bn annually RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - FCF turning positive on a sustained basis - Strengthening of relationship with Astra - Improvement in EBITDA margin to over 9% on a sustained basis Developments that May, Individually or Collectively, Lead to Negative Rating Action - Weakening linkage to or support from Astra, or significant weakening credit profile of Astra in Fitch's view - FFO net leverage increasing to above 2.0x for a sustained period LIQUIDITY Sufficient Liquidity with Ample Unused Facilities: The company repaid a significant amount of outstanding short-term bank loans using proceeds from its MTN issuance and internal cash in 2016. However, it still has available working-capital facilities, with unused amounts of around IDR2 trillion. Our rating case assumes that IDR200 billion from this facility would be drawn down in 2017 to fund working capital and capex. We believe the company should have access to its unused facilities should the need arise due to its low leverage, positive relationship with its bankers and links to the Astra group. Contact: Robin Sutanto Analyst +62 21 2988 6811 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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