March 18, 2014 / 8:47 AM / 3 years ago

RPT-Fitch affirms Pupuk Indonesia at 'AAA(idn)'; outlook stable

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March 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed PT Pupuk Indonesia (Persero)'s (PTPI) National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable.

The rating on the fertiliser manufacturer is equalised with the Indonesian sovereign given the strong legal, operational, and strategic linkages, in accordance with Fitch's parent and subsidiary linkage methodology. PTPI also continues to receive support from the Indonesian government in the form of subsidies and priority of gas allocation.

'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

Key Rating Drivers

Equalisation with Sovereign Rating: Fitch equalises the rating on PTPI with that on its ultimate shareholder, the government of Indonesia. This is based on strong operational, legal, and strategic linkages between the two, in accordance with the agency's parent and subsidiary linkage methodology. As the sole shareholder, the government has control over PTPI's strategic direction through annual budget approval and the appointment of its board of commissioners and executive management.

Stability of Staple Food Supply: The company has a public service obligation to manufacture and distribute subsidised fertilisers to farmers with farm area of less than 2 hectares. In doing so, PTPI helps to stabilise the production of rice, a staple of the Indonesian diet. Fertiliser accounts for a significant cost of production for these farmers and they would struggle to be profitable without subsidised fertilisers. In addition, this activity indirectly supports approximately 20 million households that engage in rice farming - representing around 20% of Indonesia's total population.

The government is likely to continue to ensure an adequate domestic supply of rice, given the social and political implications of rice imports. In 2013, PTPI's revenue from subsidised fertiliser to the food sector was IDR10trn, forming 18% of its total revenue.

Tangible Government Support: Tangible government support to PTPI is evidenced in the form of subsidies for its public service obligation function. The subsidy is the excess of production and distribution costs plus a pre-determined margin over the regulated fertiliser selling price. This mechanism helps to protect PTPI's margin from the volatility of gas and other raw material prices. In 2013, PTPI received subsidies of IDR20trn, which accounted for 35% of its total revenue.

Fertiliser manufacturing also receives priority in gas allocation from Ministry of Natural Resources. This is particularly important because gas accounts for 50% of PTPI's production cost and there is a tight supply of gas in the country. Debt-Funded Expansion: PTPI's plant rejuvenation and expansion into other businesses will be debt-funded. As a result, Fitch expects the company's leverage, as measured by net debt to EBITDA to peak at around 3.4x in FY14 (FY13: 2.5x) and fall below 3x from FY16 onwards. We believe that fundraising for an expansion will not be a major risk given the company's status as a state-owned enterprise.

Better Metrics Following Rejuvenation: Fitch expects PTPI's revenue growth to accelerate and its profit margin to widen as the company gradually completes its plant rejuvenation programme. This is because the updated facilities will start to contribute to production volumes and use gas more efficiently. We also note that the rejuvenation programme is progressing as scheduled and view this positively.

Rating Sensitivities

There will be no positive rating action, as the company's rating is already at the highest level on the national scale.

Negative: Future developments that could individually or collectively lead to negative rating actions include:

- Evidence of weakening links with the Indonesian sovereign might trigger a negative rating action.

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