OREANDA-NEWS. Fitch Ratings Indonesia has affirmed PT Aneka Gas Industri's (AGI) National Long-Term Rating at 'A-(idn)' with a Negative Outlook. The agency has also affirmed the ratings on AGI's IDR200bn bond II and IDR200bn sukuk ijarah II year 2012 due December 2017 at 'A-(idn)'.

The affirmation reflects AGI's expected improving credit profile following the completion of new and expanded capacities. As per end-2015, AGI's leverage (measured by net debt/EBITDA) continues to be high at 6.1x, above the 4.5x at which Fitch would consider negative rating action. However, the completion of the company's intensive capex programme will help generate more neutral FCF, while cash generation which will also be aided by capacity expansion and improving efficiencies.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher-rated category.

KEY RATING DRIVERS

Boosted by New Capacities: AGI has finalised most of its heavy expansion phase which increased the company's overall gas capacity by 43% yoy from 372 million cubic metres in 2014 to 532 million cubic metres in 2015. The additional capacity is attributed by the commencement of three Air Separation Plants (ASP) located in Cibitung (April 2015), Medan (October 2015) and Palembang (October 2015).

Fitch views the additional capacity take-up risk as manageable as the expansion was based on growing demand from AGI's customers, which will be tied in to long-term contracts and supported by extensive distribution networks. AGI's revenue grew by 29% yoy as per 1Q16, due to the additional volumes.

Wider, Stable Margins; Improved Efficiencies: Around 70% of AGI's revenue is secured by short- and long-term contracts with an average tenor of seven years. Furthermore, the selling prices in the contracts are linked with the movements in electricity tariffs, inflation and fuel prices. This should reduce the company's exposure to its major costs and allow for timely price adjustments. This contract structure has contributed to AGI's historically stable EBITDA margin of around 26%-29%.

Margins are likely to expand due to its more efficient new factories, which allows the reduction of electricity usage. Electricity is a major cost component in gas production. The margins improvement has been experienced from 1Q16, where the EBITDA margin widened to 35.6% (1Q15: 33.4%; end-2015: 29.1%). Fitch expects AGI to maintain an EBITDA margin above 30% in the future.

High leverage to Come Down: As of end-2015, AGI still recorded high net debt/EBITDA at 6.1x (2014: 5.6x), above our negative trigger of 4.5x. The high leverage was as a result of its heavy expansion phase in the last two years. However, Fitch expects AGI to deleverage as the completion of its major expansion should see slower capex. Deleveraging will be supported by higher sales, improving efficiencies and stronger economic growth. Fitch estimates AGI's net debt/EBITDA to go down to below our negative trigger from 2017.

Solid Market Share: AGI is a leading industrial gas supplier with around a 30% domestic market share; whereas its sister company, PT Samator, owns 13%. In the medical gas industry, AGI has about an 80% market share. AGI's position is supported by high barriers to entry as the sector requires intensive capex and complex technological know-how. Fitch believes that AGI's expertise - with almost 100 years of experience and an extensive distribution network - should protect its market share in the medium term.

Diversified Industry Customer Profile: AGI's customers are widely diversified across many industries. The major contributor to AGI's revenue is the retail industry (36%), followed by medical (21%), infrastructure (12%) and consumer goods (12%). We see AGI's industrial gas demand benefitting from the government's aggressive infrastructure plans. Meanwhile, medical gas demand should be supported by the government's increased healthcare industry state budget allocation to 5%, the highest-ever allocation for the industry. Furthermore, Indonesia's growing economy should be a positive in stimulating demand. (Fitch GDP 2016F: 5.1%; 2017F: 5.5%).

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- EBITDA margin between 30%-32% in 2016-2018
- No dividend payout in 2016-2018
- Capex intensity (capex/revenue) between 15%-20% between 2016-2018

RATING SENSITIVITIES

Positive: Developments that may, individually or collectively, lead to the Outlook returning to Stable include the reduction in leverage, as measured by net debt/EBITDA, to less than 4.5x
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Failure to reduce leverage to below 4.5x
- Unexpected debt-funded capex investment.