Research: Rating Action: Moody’s affirms United Tractors’ rating; outlook remains stable


Singapore, June 29, 2022 — Moody’s Investors Service has affirmed United Tractors Tbk (PT)’s Baa2 issuer rating.

The outlook remains stable.

“The affirmation reflects United Tractors’ strong operating performance amid supportive industry conditions, and improved credit metrics driven by earnings growth combined with debt reduction,” says Stephanie Cheong, a Moody’s Assistant Vice President and Analyst.

“We expect the company will continue to generate robust earnings and cash flows over the next two years, even as thermal coal prices moderate from current high spot levels,” adds Cheong, who is also analyst Moody’s lead for United Tractors.

RATINGS RATIONALE

United Tractors’ Baa2 issuer rating reflects the company’s strong balance sheet, leading market positions in Indonesia for its mining services and heavy equipment businesses, and excellent liquidity profile. The rating also reflects the company’s long-term commitment to conservative and transparent financial policies, and minimal reliance on external debt.

United Tractors’ Baa2 rating continues to incorporate a one-notch uplift to reflect Moody’s expectation of extraordinary support from the parent company, Astra International (PT), in a distressed situation. United Tractors is 59.5% owned by Astra. Astra is 50.1% owned by Jardine Cycle & Carriage Limited, which is in turn 75% owned by Jardine Matheson Holdings Limited (A1 stable).

On the other hand, the rating incorporates Moody’s expectation for United Tractors to pursue business diversification initiatives away from thermal coal, which will increase its operational and execution risks. Still, the company will likely maintain its financial discipline, strong liquidity and conservative balance sheet while it continues to invest for growth and diversification.

The rating is also constrained by the credit quality of its counterparties, which are mainly Indonesian coal miners.

United Tractors has benefited from the recovery and rise of thermal coal prices over the past year because around 80% of its revenues are tied to the thermal coal sector, either directly through its mining contracting services and coal mining segments, or indirectly through its construction machinery segment, where customers from the mining industry account for most of its machinery sales.

The company’s adjusted EBITDA and operating cash flows improved in the last twelve months ended 31 March 2022 by 52% and 29% respectively, compared to a year ago. United Tractors has cash flows from the supportive industry conditions to reduce debt, thereby increasing its adjusted net cash position to IDR26.5 trillion as of 31 March 2022 from IDR10.6 trillion a year ago.

Moody’s believes thermal coal prices will retreat from the current high spot levels towards $150 per metric ton (MT) for the rest of 2022 and further to $60-90 per MT over the medium term due to an increase in production by major exporters outside Russia as weather-related disruptions and border restrictions subside. Measure, the agency estimates that United Tractors’ adjusted leverage, as measured by debt-to-EBITDA, will remain low at 0.2x-0.3x over the next two years even as moderate earnings, as the company continues to utilize its high cash balances towards paying down debt. As of 31 March 2022, its adjusted leverage stood at 0.3x, with cash balances in excess of reported debt.

Moody’s also expects United Tractors to maintain its excellent liquidity position. As of 31 March 2022, the company had IDR35.7 trillion of cash against IDR6.4 trillion of total reported debt. Its cash holdings and operating cash flow will likely be more than sufficient to cover its short-term debt maturities, estimated capital spending and projected dividends over the next 18 months.

The stable rating outlook balances United Tractors’ conservative management and market leadership positions against the cyclicality of the company’s core segments. Moody’s expects United Tractors will continue to grow in a disciplined manner and maintain significant liquidity and low financial leverage over the next 12-18 months.

The ratings also consider the following environmental, social and governance (ESG) factors.

United Tractors faces elevated environmental risks associated with the coal mining industry, including carbon transition risk as countries reduce their reliance on coal power. This risk is somewhat mitigated because United Tractors’ customers supply coal primarily to Asia, where coal will remain a major power source because of significant existing capacity and the continued growth in power demand. That said, Asian coal miners are exposed to material credit implications, including reduced access to funding.

United Tractors is also exposed to social risks associated with the coal mining industry, including health and safety, responsible production and social trends. This is partially mitigated by the occupational health and safety principles and guidelines implemented by the company, which have led to a decline in overall workplaces since 2016.

In terms of governance considerations, the rating factors in United Tractors’ long track record of conservative financial policies and continued discipline in capital investments, shareholder returns and liability management.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A rating upgrade is unlikely, owing to sovereign constraints stemming from United Tractors’ domestic focus and high correlation with macroeconomic conditions in Indonesia.

Moody’s could downgrade the rating if United Tractors takes a more aggressive approach to its financial policies, for example an increase in acquisitions or debt investments, causing its debt/EBITDA to rise above 2.0x for an extended period, with cash balances falling below $500 million.

Moody’s could also downgrade the rating if the company’s adjusted EBITA margin falls below 15% for a sustained period.

Finally, Moody’s could also downgrade the rating if there are signs that Astra is no longer willing or able to support United Tractors, resulting in the removal of the one-notch rating uplift for parental support.

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

United Tractors Tbk (PT) is a distributor of heavy equipment to the mining, construction, forestry and agriculture sectors, and a provider of mining contracting services to the coal sector in Indonesia. The company has three other segments focused on domestic coal production, gold mining and industrial and commercial construction.

United Tractors is 59.5% owned by Astra International (PT). The remaining 40.5% share of the company is publicly traded on the Indonesia Stock Exchange.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Stephanie Cheong
Asst Vice President – Analyst
Corporate Finance Group
Moody’s Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Release Office:
Moody’s Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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