IQPlus, (11/12) - Fitch Ratings has revised Indonesia-based construction company PT Wijaya Karya (Persero) Tbk's (WIKA) Outlook to Negative from Stable. At the same time, the agency has affirmed the company's Long-Term Issuer Default Rating (IDR) at 'BB'. Fitch Ratings Indonesia has also revised the Outlook on the National Long-Term Rating to Negative from Stable, and affirmed the rating at 'AA(idn)'. A full list of the rating actions is at the end of this commentary.
The Outlook revision reflects risks that WIKA's financial profile will weaken due to potential investments in further government infrastructure projects. The company's leverage, measured by net adjusted debt/ adjusted EBITDA, could increase to above 2x, the level at which we would consider negative rating action, and remain above that in the medium term. Nevertheless, pressure on the financial profile in the medium to long term may be alleviated by improving cash flow generation, driven by robust order-book growth, which stems from WIKA's strong market position as one of the largest state-owned construction companies in Indonesia.
WIKA's ratings incorporate a two-notch uplift from its standalone credit profile of 'B+'/'A+(idn)' to reflect Fitch's expectation of exceptional support from its parent, the government of Indonesia (BBB/Stable), during distress scenarios.
'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country's highest-rated issuers or obligations.
Investment Pipeline Raises Leverage: Fitch forecasts WIKA's leverage will rise above 2x in 2020, mainly due to the company's plan to invest in large infrastructure projects over the next few years, in line with the government's focus on this area. Fitch forecasts investment outflow of IDR4 trillion-5 trillion in 2018-2019, which is likely to put pressure on WIKA's financial profile. However, the investments are uncommitted in nature and a change in government after elections next year may shift the focus away from infrastructure, which may affect WIKA's capex in the medium term.
Healthy Order Book Growth: WIKA's order book increased by CAGR of 25% in 2012-2017, bringing it to IDR107 trillion in 2017, around 4% above our expectation. However, new orders secured in 9M18 have fallen around 20% yoy, although the company forecasts growth to pick up in 4Q18, driven by expectations that a number of large government-related infrastructure projects will be awarded at the end of the year.
Fitch forecasts new orders to reach IDR45 trillion in 2018, lower than the management's forecast of IDR58 trillion, as our rating case scenario factors in risks of delays in the tender process of some larger government-related projects. New contract wins over the medium term are likely to ease gradually as the company focuses on executing its existing order book to improve revenue recognition and cash flows. Nevertheless, construction order book/adjusted revenue should remain high at between 3.5x and 4.0x in 2019-2021. (end)
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