Fitch Ratings-Singapore/Jakarta-30 August 2016: 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 USD200m 6.75% senior notes due 2019 issued by MPM Global Pte. Ltd at ‘BB-‘.
KEY RATING DRIVERS
Adequate Financial Profile: MPM’s sales and profitability continue to be under pressure, but its credit metrics remain consistent with the rating. Net debt/EBITDA excluding financial services was 2.3x in 1H16, below the 2.5x level at which we would consider negative rating action. Profitability deteriorated in 1H16 with operating EBITDA margin excluding financial services narrowing to 7.1% from 8.2% in 1H15. This was driven by continued losses in the new-car distribution business, and lower contribution from the higher margin car rental business.
MPM reduced the fleet of its rental business to 14,334 units at end-1H16 from 15,255 units at end-2014, particularly from the under-performing mining segment, and became more selective about its customers. Cash flows will be supported by the recovery in economy and low capex in the next few years.
Weak Asset Quality: Asset quality at MPM’s main financial services subsidiary, PT Mitra Pinasthika Mustika Finance (MPM Finance, A-(idn)/Stable), remained weak, with the NPL ratio at 3.2% at end June-2016. Higher provisioning expenses (partly due to the introduction of automatic write-off provisioning for cars in January 2016) reduced profitability for MPM Finance, which provides car and motorcycle financing.
Capital Injection in Subsidiary Unlikely: MPM is unlikely to inject capital into MPM Finance because the subsidiary received a large capital injection from new shareholder, Japan-based financing company JACCS, in 2014 that the company has yet to deploy. MPM Finance’s debt/equity was 2.0x at end-June 2016. Fitch assumes MPM Finance’s debt will be serviced by cash flows from the repayment of financing receivables, and that MPM Finance is able to raise funds independently.
Market Leadership: MPM’s rating reflects its market leadership in the motorcycle distribution and oil lubricant segment. MPM has the master distributorship for Honda motorcycles, Indonesia’s leading motorcycle brand, in East Nusa Tenggara and East Java. Fitch believes MPM will continue to benefit from its good relationship with Astra Honda Motor (AHM). Fitch believes that motorcycles are likely to remain the most popular mode of transportation in Indonesia, and that Honda will continue to be the leading motorcycle brand in Indonesia in the medium term.
Long-Term Contracts, Scalable Capex: Most of MPM’s car rental business is derived from corporate customers with average rental terms of more than two years, which provides visibility for cash flows. About 46% of the company’s 2016 capex budget is for car purchases for its rental business. Fitch believes the risk related to this expansion is manageable, considering the scalability of capex and management’s prudent strategy of acquiring cars after receiving orders.
Healthy Liquidity, USD Bond Hedged: Excluding financial services, MPM had cash of IDR1,030bn and unutilised credit facilities of IDR662bn, compared with IDR478bn of revolving bank loans and IDR247bn of debt, which are due in 2016 and 2017. MPM has hedged its USD200m bonds, which should mitigate forex risks as its revenue is mainly denominated in Indonesian rupiah.
Fitch’s key assumptions within the rating case for MPM include:
– Sales (excluding financial services) growth of 12% in 2016 and about 7%-10% annually in 2017-2019
– EBITDA margin (excluding financial services) of around 6%-7%
– Capex of around IDR700bn-800bn a year in 2016-2018
– No capital injection to financial services subsidiaries
Positive: 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.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
– Increase in net debt/EBITDA excluding finance subsidiaries to more than 2.5x on a sustained basis
– Significant deterioration in the performance of the financial services subsidiaries