Fitch Ratings has affirmed Indonesia-based port operator PT Pelabuhan Indonesia II (Persero)’s (Pelindo II) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’. Fitch has also affirmed Pelindo II’s senior unsecured rating and senior unsecured notes at ‘BBB’. The Outlook is Stable.
RATING RATIONALE
The affirmation reflects Pelindo II’s strong Standalone Credit Profile (SCP) at ‘bbb’, which is supported by its market-leading position in Indonesia’s container port industry, the strategic location of its flagship Tanjung Priok port as well as the long-term maturity of its concessions, which ensures visibility of group cash-flow generation. Pelindo II also benefits from stable rental income from its joint ventures (JV) under a landlord-tenant model, despite moderate flexibility in modifying tariffs. Pelindo II’s Fitch-adjusted net debt/EBITDAR is forecast at an average of 3.9x in our rating case.
Pelindo II also has strong linkages with the Indonesian sovereign (BBB/Stable) and we expect the government to extend support when required, according to our assessment under the Government-Related Entities Rating Criteria.
KEY RATING DRIVERS
Market Leading Port Operator: Revenue Risk: Volume – Midrange
Pelindo II operates the primary ports of call within its served region. Its flagship port, Tanjung Priok, is the gateway port to Jakarta, accounting for more than 48% of container throughput in Indonesia. Pelindo II has a dominant container market share with limited competition and minimal transhipment cargo. The concessions for most of its ports have 50-year terms, ending in 2065. Land access to Pelindo II’s ports is largely limited to road transport with limited rail. Tanjung Priok, with a draft of 16m, can handle vessels of 12,000 twenty-foot equivalent units.
Moderate Pricing Flexibility Supported by Fixed Rental Income: Revenue Risk: Price – Stronger
Fixed rental income from its JVs, which is more than 50% of the group’s EBITDA, insulates its revenue from throughput volatility during an economic downturn. Pelindo II’s tariffs are commercially negotiated with shipping associations but require consultation with the Ministry of Transport. This limits the company’s pricing flexibility, as demonstrated by flat tariffs for its international containers over the past few years. However, tariffs on domestic containers have been increasing. The tariff structure, once fixed, will remain valid for at least two years.
Significant, But Manageable Planned Capex: Infrastructure Development/Renewal – Midrange
The utilisation rate of container capacity remains elevated at Tanjung Priok despite the capacity addition from the commissioning of the New Priok Container Terminal (NPCT) 1 terminal in 2016. Pelindo II is constructing NPCT2 and NPCT3 to add container capacity. The company is also developing Kijing Port to support the economic growth of Kalimantan. Fitch forecasts total capex of IDR26 trillion over the forecast period to 2025 under our rating case. We expect cash balance and operating cash flow to be sufficient to fund the planned capex and dividend distribution.
Predominant Use of USD Fixed-Rate Bullet Notes: Debt structure – Midrange
Pelindo II’s consolidated debt comprises mainly senior unsecured bonds. The predominant use of US dollar bullet bonds presents a significant refinancing risk to the company, although this is mitigated by Pelindo II’s established access to capital markets, which is supported by its strong market position. Pelindo II has limited exposure to floating interest rates given its fixed-rate bonds. However, the debt structure assessment is constrained by the lack of covenants and reserve accounts for its bonds.
Strength of Linkages: Fitch regards Pelindo II’s status, ownership and control by the sovereign as ‘Strong’. The state fully owns the company and appoints its commissioners and board. It also controls its investment plans and capex decisions. We also assess the support record to Pelindo II as ‘Strong’. The government has not provided tangible support to the company, as Pelindo II has a sound financial profile. However, we expect the company to receive government support, if needed, due to its important role in the country’s economic development.
State’s Incentive to Support: Fitch sees the socio-political implications of a default by Pelindo II as ‘Moderate’. A default would damage the government’s reputation, but we do not believe it would cause a severe disruption to Indonesia’s trade activity, as port infrastructure would remain intact and could be operated by other entities. Our assessment of the financial implications of a default by Pelindo II is ‘Strong’, as the company is regarded as one of Indonesia’s key state-owned entities and a default would hamper investor confidence in the sovereign and other state-owned entities.
PEER GROUP
Pelindo II’s closest peer is PT Pelabuhan Indonesia III (Persero) (BBB-/Stable, SCP: bb+). Pelindo II’s better SCP assessment is supported by its larger container market share in Indonesia, stable rental income from JVs and better financial profile in spite of similarly aggressive capex plans to support the development of the Indonesian maritime industry.
Adani Ports and Special Economic Zone Limited (APSEZ, BBB-/Negative, underlying credit profile: bbb) has the largest commercial port operations in India. APSEZ also benefits from sticky cargo, which accounts for about 56% of total traffic. APSEZ also benefits from its sufficient capacity to support medium-term throughput growth. Pelindo II’s comparable business and financial profiles justify a similar credit assessment, in our view.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– Upgrade of Indonesia’s sovereign rating combined with strengthening linkages with the government
– Pelindo II’s SCP could be revised upwards if there is sustained improvement in its Fitch-adjusted net debt/EBITDAR below 3.0x. However, the group’s IDR will be constrained by that of the sovereign.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Downgrade of Indonesia’s sovereign rating
– Fitch-adjusted net debt/EBITDAR sustained above 4.0x
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
CREDIT UPDATE
Pelindo II’s container throughput fell by 10% in 2020 following a drop in both international (-11%) and domestic throughput (-8%), compared with the 2.1% contraction in Indonesian GDP in 2020. Cargo throughput fell by a more significant 15% in 2020, mainly driven by the drop in general cargo (28%) and dry bulk cargo (15%).
As a result, the company’s 2020 revenue dropped 6% due to the weak throughput during the pandemic. EBITDA declined by 10%, although Pelindo II maintained its margin at about 30%, supported by lower operating expense of 4% from 2019. Pelindo II’s cost-efficiency programme during the pandemic helped to lower its major costs of employee and partnership expense by about 9% and 8%, respectively.
FINANCIAL ANALYSIS
The Fitch base case forecasts container throughput to recover to pre-pandemic levels in 2024 and in line with GDP growth in 2025. We forecast throughput will increase at a 4.1% CAGR between 2020 and 2025, reflecting our current assessment of the impact of the pandemic on the throughput growth. We assume container tariff will track Indonesian inflation. We assume EBITDA margin will average 34% and total capex will amount to IDR26 trillion during the forecast period. Fitch’s base case generates an average adjusted net debt/EBITDAR average of 3.6x over 2021-2025, with a maximum of 4.4x in 2023.
The Fitch rating case assumes similar recovery in 2024 with a lower growth rate at a 3.3% CAGR between 2020 and 2025, reflecting our current assessment of the impact of the pandemic on the throughput growth. We assume container tariffs will increase by 2% per year. We assume its EBITDA margin will average 32%, while we assume a similar capex budget to base case. Fitch’s rating case generates an average adjusted net debt/EBITDAR of 3.9x, with a maximum of 4.8x in 2023.
Source: Fitch Ratings