OREANDA-NEWS. Fitch Ratings has affirmed PT Mitra Pinasthika Mustika Tbk's (MPM) Long-Term Issuer Default Rating at 'BB-' with a Stable Outlook. The agency has also affirmed the motorcycle distributor's senior unsecured rating at 'BB-' and its USD200m 6.75% senior notes due 2019 issued by MPM Global Pte. Ltd at 'BB-'.

KEY RATING DRIVERS
Pressure on Volume and Earnings: Weak economic conditions have put pressure on MPM's overall revenue and earnings over the past 12 months. MPM reported a 7.1% drop in volume sales of two-wheeled vehicles in 1H15, although this was less severe than the 24% fall in overall sales in domestic market. Profitability, particularly in MPM's financial services segment, narrowed, due to the economic slowdown, tougher competition and higher cost of funding. Profit margins were also negatively impacted by the opening of six new Nissan/Datsun car dealerships in the past year. Fitch expects that it will take one to two years before the new car business starts to contribute positive operating cash flows to the group.

Weak Performance at MPM Finance: Asset quality at PT Mitra Pinasthika Mustika Finance (MPM Finance, (A-(idn)/Stable), which provides car and motorcycle financing, has been deteriorating, which put pressure on profitability. Its net profit declined by 69% yoy in 1H15 due to higher credit costs and higher funding costs. Nonetheless, MPM Finance has a comfortable capital base after a large equity injection by Japan-based JACCS Co Ltd in 2014. That makes it unlikely that MPM would need to provide additional equity to MPM Finance.

Scalable Capex, Moderate Leverage: Fitch believes MPM's financial profile is still consistent with its rating despite the challenging environment. Its net debt/EBITDA excluding the financial services segment was about 1.8x (annualised) in 1H15. The company conserved cash by scaling back its capex for this year and next year. The bulk of capex planned in 2016-18 is for expanding its fleet of vehicles for rental under MPM Rent. The company adopts a conservative approach to expansion by securing contracts prior to acquiring new vehicles. This provides the company with flexibility and reduces execution risk.

Leading Motorcycle Distributor: MPM's ratings are supported by its strong position in the distribution of Honda motorcycles in East Java, and its roughly 20% share of the domestic motorcycle oil lubricants market by sales. MPM holds the master distributor licence for Honda motorcycles in East Java and East Nusa Tenggara. Honda is the leading brand for motorcycles in Indonesia, accounting for 78% of all motorcycles sold in East Java and 67% nationally in 1H15. MPM's business concentration in East Java is mitigated by the diverse activities in the regional economy, which makes it more resilient compared with other regions.

Good Relationship with AHM: MPM benefits from a strong long-term relationship with Astra Honda Motor (AHM), which is the producer of Honda motorcycles in Indonesia. Fitch believes MPM's long, solid track record and its extensive networks give it bargaining power in negotiations to maintain its exclusive distributorship rights in East Java and East Nusa Tenggara. Fitch believes MPM can continue to use Honda's good brand awareness in Indonesia, high resale value, and attractive models to maintain its market share.

Healthy Liquidity: Excluding MPM Finance and MPM Insurance, MPM had cash of IDR932bn and unutilised banking lines of IDR631bn at end-1H15, more than sufficient to cover its revolving short-term bank loan of IDR204bn, borrowings due in one year of IDR134bn, and swings in working capital throughout the year.

Benefits from Express Acquisition: MPM, its parent - PT Saratoga Investama Sedaya Tbk - and Golden Valley Advisors Inc, are planning to acquire 51% of taxi company PT Express Transindo Utama Tbk (Express, A(idn)/Stable). Fitch expects the acquisition to increase MPM's net leverage excluding the financial services segment by about 0.3x-0.4x to around 2.9x by end-2015, depending on the final investment in Express. The investment in Express will give MPM opportunities to supply vehicles and lubricant oil to Express' 11,000 regular taxis.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for MPM include:
- Sales of two-wheel vehicles to fall 7% in 2015, rise 3% in 2016 and climb 6% a year in 2017-18
- MPM Rent's fleet size of about 14,000 in 2015 and 10% growth afterwards
- Capex of about IDR900bn in 2015-16 and about IDR1trn in 2017-18
- Investment in shares of Express in 2015

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Increase in net debt/EBITDA excluding finance subsidiaries to more than 2.5x on a sustained basis
- Significant deterioration in the performance of the financial services subsidiaries on a sustained basis

No positive rating action is expected in the next 24 months, unless there is significant increase in scale without any deterioration in its financial profile.