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June 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Indonesia-based plastic packaging producer PT Berlina Tbk's National Long-Term Rating at 'A-(idn)' with Stable Outlook.
'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.
Temporary increase in leverage: Leverage as expressed by net debt/EBITDA increased to 2.6x in 2013, above the negative trigger guideline of 2.0x, mainly caused by rising costs and intensive capex. The rising costs are due to an increase in minimum wage, a hike in the electricity tariff and higher raw material costs from the rupiah's depreciation. Meanwhile, capex was quite high as the company expanded its capacity, acquiring PT Quantex (auto oil bottling manufacturer) and establishing PT Natura Plastindo (a plastic processing company). Nonetheless, we forecast leverage to moderate as margins improve, while expanded capacity and new businesses generate higher cash flows.
Established relationship with Unilever: Berlina has established a long-term relationship with its key customers, such as Unilever. The relationship with Unilever has spanned over 40 years with Berlina as a key supplier for plastic packaging. The Unilever group (Unilever NV /Unilever PLC, both 'A+'/Stable), contributed to 69% and 51% of Berlina's total sales in 2013 and 1Q14 respectively. Berlina's reliance on the Unilever group is a positive point, considering its creditworthiness and its dominant position in Indonesia's growing fast-moving consumer goods (FMCG) industry.
Cost pass through mechanism: Berlina has a long-term agreement with its customers on a cost-pass through pricing scheme. This helps the company to mitigate foreign exchange and raw material price risks, and to maintain a relatively stable long-term margin.
Manageable execution risk: Execution risk with regards to expansion is mitigated through management's conservative expansion initiatives. Investment in additional capacity is normally made after securing at least half of the sales contracts. Furthermore, the company has some flexibility to scale back or delay its capex in case demand slows.
Small operating scale: Berlina's rating is constrained by its smaller business scale, compared with higher-rated manufacturing peers. Small-scale operators are often constrained by limited financial flexibility in terms of funding.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
- weakening of net debt/EBITDA at above 2x on a sustained basis
- deteriorating in EBITDA margin to below 14% on a sustained basis Positive rating action is not expected over the medium term, due to Berlina's small operating scale.