(The following statement was released by the rating agency)
Feb 24 -
Summary analysis -- PT Gajah Tunggal Tbk. -24-Feb-2012
CREDIT RATING: B/Stable/-- Country: Indonesia
Primary SIC: Tires and inner
Credit Rating History:
Local currency Foreign currency
08-Nov-2010 B/-- B/--
07-Aug-2009 B-/-- B-/--
23-Jul-2009 SD/-- SD/--
15-Jun-2009 CC/-- CC/--
20-Apr-2009 CCC+/-- CCC+/--
The rating on Indonesian tire manufacturer PT Gajah Tunggal Tbk. reflects our view of the company’s highly leveraged financial risk profile, its exposure to the cyclical and competitive tire manufacturing industry, and its limited financial flexibility. Gajah Tunggal’s competitive cost position and leading share in the Indonesian tire market temper these weaknesses.
We expect Gajah Tunggal’s financial risk profile to remain highly leveraged in 2012, despite some improvement in the company’s capital structure in 2011. Gajah Tunggal repaid 2.5% of its US$420 million bond in July 2011, reducing its absolute debt burden by about US$10 million. We expect the company’s ratio of total debt to EBITDA at about 2.8x-3.2x in 2012 under our base-case assumptions. The ratio was 2.9x for the 12 months ended Sept. 30, 2011. Total debt includes about Indonesian rupiah (IDR) 360 billion of pension obligations as of Sept. 30, 2011.
In addition, Gajah Tunggal’s exposure to fluctuations in the rupiah is high, in our view, given the mismatch between revenues primarily generated in rupiah and debt that is in U.S. dollars. The company’s leverage could increase significantly if the rupiah weakens substantially against the U.S. dollar. Gajah Tunggal recorded a gain on foreign exchange of IDR52.2 billion for the nine months ended Sept. 30, 2011, following a more substantial IDR142.3 billion gain in 2010.
We view Gajah Tunggal’s business risk profile as weak. The company is exposed to the cyclical and competitive tire industry, margin volatility, and geographic concentration to the Indonesian tire market. We believe Gajah Tunggal’s margins will likely remain sensitive to the fluctuations in raw material prices in 2012. We forecast the company’s EBITDA margin to be between 11.5% and 12.5% in 2012. Rubber prices have started picking up again since the beginning of 2012, after a significant decline in the fourth quarter of 2011. Oil and oil derivative prices also remain high. We believe that Gajah Tunggal’s ability to pass-through potentially higher raw material costs will diminish in 2012, because we expect the competition in the motorcycle sector in Indonesia to intensify. The company’s EBITDA margin reached 11.6% for the nine months ended Sept. 30, 2011, on revenues of IDR8,722 trillion.
Gajah Tunggal’s liquidity is “adequate”, as defined in our criteria. Nevertheless, we expect free operating cash flows for the next 12 months to remain marginally negative. This is because of additional working capital requirements from the company’s growth and residual capital spending will likely exceed its funds from operations. This should weaken liquidity and deplete the company’s cash balance.
We expect Gajah Tunggal’s liquidity sources to exceed its liquidity needs by about 1.2x in the next 12 months. Our liquidity assessment incorporates the following factors and assumptions:
-- We anticipate funds from operations of about IDR900 billion in 2012. The company also had a cash balance of about IDR566 billion and short-term investments of about IDR418 billion as of Sept. 30, 2011. We have considered only 50% of the value of short-term investments in our liquidity assessment to reflect their possible lack of marketability.
-- We believe Gajah Tunggal’s 25.5% stake in the Indonesia stock exchange-listed PT Polychem Indonesia Tbk. (not rated) also marginally supports the company’s liquidity. Gajah Tunggal reduced its stake from 28.5% by selling shares in the open market in the third quarter of 2011. The market value of the remaining 25.5% is about IDR550 billion. Although we understand Gajah Tunggal is considering options regarding its PT Polychem stake, our liquidity assessment assumes that the company could sell more shares in the open market to replenish its cash balance if liquidity weakens materially.
Gajah Tunggal’s liquidity needs in the next 12 months include our expectation of about than IDR650 billion in working capital requirements, and capital expenditure of about IDR275 billion. Liquidity needs also include repayment of 2.5% of the initial outstanding principal amount on the 2009 restructured bond due on or before July 21, 2012, of about IDR94 billion, and accrued interests of about IDR174 billion. We also factor in approximately IDR50 billion in shareholder distribution in June 2012.
The stable outlook reflects our expectation that Gajah Tunggal will maintain its good market position in the Indonesian tire market in 2012. The outlook also reflects our view that the company’s financial performance will remain adequate for the rating in the next 12 months. We expect Gajah Tunggal’s EBITDA margin to remain above 11.5% and ratio of total debt to EBITDA to stay below 3.5x in the next 12 months despite high raw material prices and intense competition.
We may lower the rating if Gajah Tunggal’s profitability weakens more than we expect, such that the ratio of total debt to EBITDA is more than 4x on a sustainable basis. This could materialize if: (1) raw material prices increase further and remain high; or (2) intense competition makes it difficult for the company to pass through sufficient cost increases to customers.
We could also lower the rating if Gajah Tunggal’s liquidity weakens more rapidly than we expect, with negative free operating cash flows persisting beyond the next 12 months and depleting the company’s cash balance and investment portfolio. This situation could occur if the company‘s: (1) working capital requirements are more than we expect because of a lengthening of account receivables or the rapid accumulation of inventory; (2) expansion strategy requires more cash than we currently anticipate; and (3) dividend distribution is significantly higher than we expect.
In our view, an upgrade is unlikely in the next 12 months because we believe the company’s financial structure will remain highly leveraged. Nevertheless, we may raise the rating if Gajah Tunggal’s operating performance and profitability increase significantly, such that the ratio of total debt to EBITDA stays below 3x on a sustainable basis. In our view, this would require a significant and lasting decline in raw material prices or further substantial increases in prices without jeopardizing the company’s market position.