RPT-Fitch: Limited Impact on Electricity Tariff Increase

Mon May 12, 2014 5:21am EDT

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May 12 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings said the government's decision to raise electricity rates for industry will have limited impact on companies rated by Fitch. Despite the increase in electricity tariff will pressing the profit margin for the time being, the company will be able to gradual increase in the charge to the consumer, because they has a strong position in the industry. Furthermore, electricity is not is a major cost component for most of the industrial portfolio rated by Fitch.

In January 2014, the government and parliament have agreed to raise tariffs industrial electricity began on May 1, 2014. Increased rates ranged between 40% - 65% and will be implemented in stages every two months from May until November 2014. If the new tariff has been applied in full, government expects to save electricity subsidies around USD 8.9 trillion (USD 774 million).

Among the portfolio are rated by Fitch industry, industrial gas supplier PT Aneka Gas Industri (AGI; A-(idn) '/ Stable) will be most affected by This rate increase. Overhead costs, especially the cost of electricity, contributing approximately 70% of the production cost of AGI. Although the sales contract AGI allows companies charge around 60% of the increase in electricity prices in consumers, AGI still have to absorb about 40% of the increase. though Thus, Fitch expects increased efficiency, thus mitigating partly of the impact of electricity price increases, so that the level of profit margins the company will be able to remain stable or only slightly eroded in 2014.

Impact on other companies such as PT Berlina Tbk (Berlina; A-(idn) '/ Stable), PT Japfa Comfeed Tbk (Japfa; BB-/ A + (idn)' / Stable), and PT Fajar Solar Wisesa (Dawn, B + / A (idn) '/ Stable) will be limited due to the cost of electricity not a major component in the cost of production. Berlina is a manufacturer plastic packaging, Japfa is a manufacturer of animal feed, and Dawn is a manufacturer packaging made from paper. At the end of 2013, overhead costs contribute about 20% or less of the total cost of production in each the company. The three companies also have a market position strong in their respective industries, such as AGI, and Fitch believes it is allowing companies to charge the production cost increases consumers gradually.

The increase electricity rates will impact smaller for palm oil companies because most of the run of the mill upstream producers using steam-powered generators. Overhead costs contribute less than 5% of the total cost of production for companies such as PT Sinar Mas Agro Resources and Technology Tbk (AA (idn) '/ Stable), PT Ivo Mas Tunggal (AA (idn)' / Stable), and PT Sawit Mas Sejahtera (AA (idn) '/ Stable). The third company is a subsidiary company of Golden Agri Resources Ltd.

Higher electricity rates will also be applied to luxury residences, shopping centers, hotels, and government offices. For PT Lippo Tbk Karwaci (Lippo; BB-/ A + (idn) '/ Stable), the majority of revenue comes from recurring shopping centers, hospitals, and hotels. For shopping centers, Lippo imposes a significant portion of utility costs to tenants, while kepemimipinan hospital market segment allows the company to charge of electricity cost increases kapada patients. The company has more limited flexibility in the operation of the hotel to charge hike operating costs due to intense competition. Nevertheless, the pressure on hospitality margin will not change the overall Lippo profile because The segment is not a major source of cash flow.

The cost of electricity is also not mnerupakan major cost component for retailers are rated by Fitch, as Alfaria Trijaya Resources Tbk (Alfamart; AA-(idn) '/ Stable) and PT Multipolar Tbk (Multipolar; B + / Stable). Cost of electricity generally contribute about 10% of total operating costs, the cost of operations largely consist of employee costs. The increase in rates will slightly depress margins, but Fitch believes the increase in sales from stores that opened in recent years to compensate for the increase operating costs so the profit margin of both companies will remain stable.

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