August 11, 2017 / 8:01 AM / a year ago

Fitch Assigns First-Time 'AA(idn)' to Mayora; Outlook Stable

(The following statement was released by the rating agency) JAKARTA, August 11 (Fitch) Fitch Ratings Indonesia has assigned a first-time National Long-Term Rating of 'AA(idn)' to food and beverage company, PT Mayora Indah Tbk. The Outlook is Stable. Mayora's rating underpins its leading market position, strong brands, diversified revenue base, low leverage, solid liquidity and cash flow generation. These factors help offset Mayora's smaller EBITDA scale against similarly rated peers. The rating also reflects the company's exposure to raw material price fluctuations that affect its profitability. '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 Leading Market Position, Strong Brands: Mayora's rating reflects its leading market position across various product categories, including biscuits, crackers and instant cereals, based on Nielsen and top-brand market surveys. The company produces some well-known household names in these categories. We believe Mayora will maintain its brand equity through significant advertising and promotion expenses of around 10%-11% of revenue. The strong brand names will in turn ensure the company has a secure foothold in Indonesia's food and beverage market. Revenue Diversification: Mayora's credit profile benefits from diversified revenue by geography and product category. Exports accounted for 45% of the company's sales in 2016 - with destination markets in various regions, such as Asia, Africa and Europe - while the remainder was sold domestically. In addition, no single product category contributes more than 35% to revenue. Instant coffee and biscuits were the largest revenue contributors in 2016, contributing 34% and 31%, respectively. Raw Materials Volatility: The company is inherently exposed to commodity market volatility, as 55%-60% of its costs are attributable to raw materials, such as coffee, sugar and milk. Fitch expects Mayora's solid market position and strong brand name to help maintain a stable EBITDA margin of around 13%-14% in the next three years. Mayora has reasonable pricing power, which allows it to pass on higher costs from fluctuating raw material prices without significantly affecting product demand. Mayora adjusted its selling prices in 2015 due to weak demand and high raw material prices, resulting in its EBITDA margin recovering to above 15%, from 9% in 2014. Exports Hedge Against Forex Exposure: Overseas sales help Mayora lower forex exposure risk from raw material purchases. The company imports around 20% of its annual raw material requirements, including wheat, milk and sugar, with purchases denominated in US dollar. Exports also alleviate forex exposure risk from US dollar-denominated capital expenditure for new machines. Low Leverage, Solid Cash Flow: Fitch estimates that Mayora's scale will help it maintain neutral or positive free cash flow, even while spending around IDR800 billion on annual capex and paying 30% of its net income as dividends in 2017-2019. We forecast net adjusted debt/EBITDAR to remain conservative, at around 1.1x, during this period. DERIVATION SUMMARY The rating of Mayora is comparable with PT Tower Bersama Infrastructure Tbk (TBI, AA-(idn)/Stable). Both companies generate adequate positive pre-dividend free cash flow after capex. However, TBI funds its capex through bank debt and uses cash flow for its aggressive policy of large dividend payments and shares buybacks. TBI also faces much higher foreign exchange risk, as most of its loans are denominated in US dollars but it generates little US dollar revenue. Mayora's lower leverage, combined with minimal currency risk and the absence of aggressive financial policy, warrant a one-notch rating difference against TBI. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 2%-3% annual volume growth across all product categories for domestic and export sales in 2017-2019. - Advertising and promotion expenses accounting for around 11% of revenue in 2017-2019 (2016: 9%). - Capex of around IDR800 billion in 2017-2019 (2016: IDR765 billion). - 30% dividend payout ratio in 2017-2019 (2016: 22%). RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Positive rating action is not expected unless the company significantly improves its scale while maintaining a stable financial profile. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Increasing working capital requirements or higher-than-expected capex that results in free cash flow turning negative for a sustained period. - Net adjusted debt/EBITDAR rising above 1.5x for a sustained period. - Declining profitability, as measured by the EBITDA margin, falling below 10% for a sustained period. LIQUIDITY Diversified Access, Ample Liquidity: Mayora has solid funding access, with facilities coming from a number of domestic and foreign banks. The company had around IDR2.3 trillion of undrawn working capital facilities as a liquidity buffer at end-2016. Mayora also has strong access to the domestic bond market, with prior issuance of bonds and sukuk. This was evident by the refinancing of IDR250 billion maturing sukuk in March 2017 by the issuance of a IDR500 billion bond. Contact: Primary Analyst Olly Prayudi Director +62 21 2988 6812 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 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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