· 

Indika Energy

Indika Energy

Indonesia | Metals & Mining – Fixed Income

 

Background

 

PT Indika Energy Tbk. (Indika) is an integrated Indonesian energy company involved in three primary businesses: Energy Resources, Energy Services and Energy Infrastructure, which accounted for 40%, 49% and 11% of total revenues in FY17.

 

Within Energy Resources, Indika’s key asset is its 91% subsidiary PT Kideco Jaya Agung (Kideco), Indonesia's third-largest domestic coal producer and one of the world's lowest-cost producers and exporters of coal. Besides Kideco, Indika also owns a 60% stake in PT Mitra Energi Agung, a greenfield coal project, and 85% of PT Multi Tambang Jaya Utama (MTU), a domestic thermal and coking coal project. MTU is a bituminous thermal coal and coking coal mining company based in Central Kalimantan holding a CCOW third generation concession expiring in 2039.

 

Within Energy Services, Indik’s wholly-owned subsidiary Tripatra (established in 1973) is involved in multidiscipline engineering and construction projects for the energy industry. Major customers are multinational companies including Chevron, Exxon Mobil and HESS. Indika also owns 69.8% of Petrosea, one of the largest contract miners in Indonesia providing pit-to-port services. Petrosea‟s main business is in mining where its client base includes large multinationals such as BHP Billiton, Newmont and Noble Group. Petrosea also has a smaller Engineering & Construction Services Business.

 

Energy Infrastructure business segment includes the 51% owned PT Mitrabahtera Segara Sejati Tbk. (MBSS), an integrated coal transport and logistics service company, acquired in Mar 2011. MBSS customers are primarily the country’s major coal producers such as Adaro, KPC and Berau Coal.

 

Besides the mining services, Indika has also expanded further downstream into coal power generation. Indika also owns a 20% stake in Cirebon Electric Power (CEP), a 660 Megawatt (MW) coal-fired steam power generation plant, and a 6.25% stake in Cirebon Energi Prasarana (CEPR), a 1,000 MW coal-fired steam power generation plant.

 

Indika was listed in the Indonesian Stock Exchange on June 11, 2008. The company is publicly traded with a current market value of approximately IDR19.0 trn (~USD1.3m) as of 26 June 2018. Indika is rated ‘Ba3/Stable’ by Moody’s and ‘B+/Positive’ by Fitch. As of Mar 2018, it was 37.79% owned by PT Indika Inti Investindo (65.2% held by Agus Lasmono and 34.8% held by Arsjad Rasjid and his family) and 30.65% owned by PT Teladan Resources (100% controlled by Wiwoho Basuki Tjokronegoro and his family).

 

Financial performance

 

Indika reported strong 1Q18 results, supported by higher coal sales volumes and average selling prices (ASP) at Kideco. This is the first quarterly earnings which consolidated Kideco’s financials following the completion of an additional 45% stake acquisition in Dec 2017. Balance sheet also strengthened remarkably with $100m added to the cash pile.

 

We expect some moderation in contribution from Kideco in the coming quarters owing to the full impact of the DMO price cap (effective 12 Mar) from 2Q18 onwards. However, with Newcastle coal prices remaining high, we see room for further deleveraging at Indika.

 

1Q18 consolidated revenue surged to $809m from $404m in 4Q17 and $223m in 1Q17, while adjusted EBITDA (including dividend receipts from associates) rose to $224m from $145m in 4Q17 and $27m in 1Q17.

 

Kideco remains the top earnings contributor, accounting for 65% of consolidated revenues and 87% of group EBITDA in 1Q18. Quarterly revenues and EBITDA rose 25% yoy and 36% yoy to $528m and $195m respectively, on a 10% increase in sales volumes to 9.4mt and 14% increase in ASP to $56.4/ton. Higher strip ratio (5.9x versus 5.4x) and fuel cost pushed up cash cost of production (excluding royalty) to $27.6/ton in 1Q18 (+7% yoy), but this remained within management's guidance of $30/ton for 2018.

 

The stronger results from Kideco offset the weaker financials at the other subsidiaries, Petrosea, MBSS and Tripatra. Despite revenues increasing by 18% yoy on improved contract mining and engineering and construction business, Petrosea’s EBITDA only increased by 14% to $19.7m, possibly due to frontloading of cost for new contract starts. MBSS' coal transportation business remains under pressure in 1Q18 with revenues down 19% yoy to $12.6m and EBITDA halved to $2m. Tripatra, its engineering and construction contractor for energy services, too was weaker with revenues down 14% yoy to $60.3m. Despite the lackluster 1Q18 results, we await to see if the higher coal prices would eventually translate to improved earnings profile at Petrosea and MBSS.

 

On the balance sheet, the company’s gross debt balances declined slightly to $1.4b on repayment of short term bank loans. Cash and short term financial assets grew by $100m sequentially to $809m at end Mar 2018. As a result, net debt balances declined to $586m from $717m in the previous quarter. Coupled with higher EBITDA, LTM gross debt/EBITDA, net debt/EBITDA and EBITDA/interest improved to 3.1x, 1.3x and 5.5x, from 5.4x, 2.8x and 3.4x as of FY17.

 

Conclusion and recommendation

 

Indika reported strong 1Q18 results, supported by higher coal sales volumes and average selling prices (ASP) at Kideco. This is the first quarterly earnings which consolidated Kideco’s financials following the completion of an additional 45% stake acquisition in Dec 2017. Balance sheet also strengthened remarkably with $100m added to the cash pile.

 

We continue to like the fundamental credit story of Indika, given the improving credit profile, large cash pile, further deleveraging potential from elevated coal prices, and the natural FX hedge of its commodities operations. We project EBITDA to increase from $457m LTM Mar 2018 to $700m in 2018, based on Newcastle price of $80/ton and 32mt sales volumes. Assuming current gross and net debt levels, that will imply very solid credit profile with gross debt/EBITDA and net debt/EBITDA at 2.0x and 0.8x. Further upside could come from Newcastle coal staying at $100/ton price levels and higher sales volumes to 34mt.

 

While the company is expected to utilize its existing abundant cash balances to diversify away from coal operations, we expect management to adopt a conservative investment strategy. Recently, Indika announced the plans to invest $108m to build, own and operate a terminal to store and deliver fuel products and associated services in East Kalimantan, for the exclusive use of PT ExxonMobil Lubricants Indonesia. The contract will be valid for 20-years with an option for a 10-year extension. Groundwork is expected to start in 2H18. Although capex would increase in the near term, we view this positively given the strong counterparty and recurrent nature of the business. We will continue to monitor Indika‟s investments in new businesses. Management had also highlighted its intention to deleverage, potentially by paying down debts earlier, especially if it does not find suitable investments. A more pro-active liability management exercise to reduce the lumpiness of its debt maturities from 2022 to 2024 could trigger ratings upside from Fitch, which currently rates Indika B+/Positive Outlook.

 

 

We are maintaining our Buy recommendations for the entire INDYIJ curve. Among the 3 bonds, we prefer the 2023s (95.5 / YTM 7.6%) and 2024s (90.5 / YTM 7.8%) over the 2022s (99.5 / YTM 7.0%), due to the higher yield adjusted for tenor of the ‘23s and the lowest cash price of the ‘24s.