August 23, 2017 / 4:14 AM / 3 months ago

Fitch Affirms MPM at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, August 23 (Fitch) Fitch Ratings has affirmed PT Mitra Pinasthika Mustika Tbk's (MPM) Long-Term Issuer Default Rating at 'BB-' with a Stable Outlook. The agency has also affirmed the motorcycle distributor's senior unsecured rating at 'BB-' and its USD200 million 6.75% senior notes due 2019 issued by MPM Global Pte. Ltd at 'BB-'. MPM's rating reflects its strong market position in motorcycle distribution in East Java, Indonesia and motorcycle oil lubricants in the domestic market. The inherent cyclicality of the auto industry is balanced by MPM's leverage profile and stable cash flow from its auto services segment. We believe MPM has flexibility over its capital expenditure. KEY RATING DRIVERS Challenging Auto Environment, Gradual Recovery: MPM continued to face a challenging environment because of weaker purchasing power in Indonesia. The company's motorcycle sales volume dropped 11% yoy to 406,000 units in 1H17, in line with the industry. Car sales volume fell 67% yoy in 1H17 as the company reduced its stores amid strong competition. Nissan and Datsun cars, which MPM distributes, continued to lose market share as the brands did not launch as many new products as competitors. The company this year closed six of its 11 car dealerships that were not profitable. We do not expect the operating environment to deteriorate further, and forecast Indonesia's GDP growth to be higher in 2018 and 2019 than in 2017. Credit Metrics Stabilising: Despite the more challenging environment, MPM's net debt/operating EBITDA was at 2.5x and 1.7x as of 2016 and 1H17 respectively, a level that we think is still appropriate for the rating. In 1H17, proceeds from the sale of a stake in MPM Finance were used to lower leverage. We expect the company's leverage to remain below 2.5x in the next three to four years. Strong Market Positions: MPM has a strong position in the East Java motorcycle market, where it is the sole distributor of Honda motorcycles in the region. We think the concentration on a single brand is offset by the strong market share, Honda's good brand name and MPM's strong and established relationship with PT Astra Honda Motor (AHM). In the motorcycle oil lubricant market, MPM has around 20% market share by sales with its "Federal Oil" brand. We expect the company to maintain its strong position in the motorcycle and oil lubricant business, and generate robust operating cash flows. Flexible Capex: The company has set aside about 90% of its capex budget in 2018-2021 for car-rental services. This capex can be scaled back to conserve cash if conditions are not favourable. Most of MPM's car-rental business comes from corporate customers with average rental terms of more than two year. The company takes a measured approach to expansion by ensuring that it secures contracts before acquiring vehicles. Partial Divestment of MPM Finance: MPM divested 20% of its shares in MPM Finance for IDR453 billion in cash to its strategic partner, JACCS Co., Ltd., a Japan-based consumer finance company. MPM has a 40% share in MPM Finance after the divestment, while JACCS owns 60%. We believe MPM Finance will have better access to funding and lower cost of funding with JACCS as its majority shareholder. The reduction in interest does not impact MPM's credit profile as MPM Finance contributed less than 10% of net income. For our analysis, Fitch has deconsolidated MPM's financial-services subsidiaries. We view MPM Finance's debt/equity of 2.3x at end-2016 as adequate. Bond Refinancing: MPM plans to recall its USD200 million, 6.75% senior notes issued in 2014 and refinance them using new club deal. MPM has signed a Dual Tranche Club Deal Facility of USD150 million and IDR1.25 trillion. The refinancing will extend its maturity profile to 2022, lower its cost of funding and provide cash flow flexibility to fund its capex needs in the short to medium term. As part of the management's strategy, the dollar exposure will be hedged. DERIVATION SUMMARY MPM's rating of 'BB-' is well positioned relative to peers such as China Grand Automotive Services Co., Ltd (CGA, BB-/Stable) and PT Sri Rejeki Isman Tbk (Sritex, BB-/A+(idn)/Stable). Both MPM and CGA are exposed to the cyclical and competitive automotive industry and thin margins in the distribution business. CGA has a larger scale and geographical presence with more diversified brands than MPM. However, MPM has more diversified businesses, wider overall margins, lower leverage and better coverage than CGA. As a result, the ratings on MPM and CGA are at the same level. Sritex is one of Indonesia's largest integrated textile companies. Compared with MPM, Sritex has wider margins and a larger scale, with EBITDA expected at USD170 million by 2018. This is offset by MPM's lower leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Sales to decline by 3% in 2017, and increase by 6% per year from 2018 - Operating EBITDA margin of around 6.2%-6.3% - Capex of IDR650 billion in 2017 and around IDR740 billion-790 billion in 2018-2020 - Dividend payout of IDR200 billion in 2017 and IDR150 billion per year from 2018 - No capital injection to and no dividend inflows from financial-services subsidiaries RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - No positive rating action is expected in the next 24 months, unless there is significant increase in scale without any deterioration in its financial profile. Developments That May, Individually or Collectively, Lead to Negative Rating Action - Increase in adjusted net debt/operating EBITDAR excluding finance subsidiaries to more than 2.5x on a sustained basis - Sustained decline in market share of motorcycle distribution and/or significant decrease in fleet size of its auto services business - Significant investment or change in product mix or core business, which may increase company's risk profile LIQUIDITY Bond Refinancing, Comfortable Liquidity: MPM had cash of IDR1,074 billion compared with its IDR191 billion in short-term borrowing as at end-June 2017. MPM has signed a Club Deal Dual Tranche facility of USD150 million and IDR1.25 trillion. The proceeds will be used to refinance its USD200 million 6.75% senior notes due 2019 and the rest for general purposes. The refinancing of the bonds will extend its maturity schedule to 2022 and will provide cash flow to fund its capex needs in the next two years. Contact: Primary Analyst Akash Gupta Associate Director +65 6796 7242 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Rufina Tam Associate Director +62 21 2988 6813 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments - Financial Service entities are deconsolidated. 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. 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