OREANDA-NEWS. Fitch Ratings Indonesia has affirmed Indonesia-based plastic packaging manufacturer PT Berlina Tbk's (Berlina) National Long-Term Rating at 'A-(idn)' with a Stable Outlook. The agency has also affirmed the ratings on Berlina's IDR200bn medium-term notes due in December 2017 at 'A-(idn)'.

'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
Debt-funded Expansion Increases Leverage: The company operates in a relatively capital-intensive industry and needs to increase capacity in order to meet growing demand. Consequently, leverage (as measured by net debt/EBITDA) increased to 2.9x as of June 2015, and Fitch expects a range of 2.0x-3.0x. Counterbalancing the higher leverage is the company's conservative approach of ensuring that at least 50% of the expanded capacity is contracted.

Diversifying Customer Base: Fitch views Berlina's diversification strategy as beneficial in the longer run. The company entered the automotive segment with the acquisition of Quantex, a manufacturer of oil lubricants packaging. Berlina is also targeting building materials, food and beverage, auto parts, agricultural and chemical segments.

Leading Position in Indonesia: Berlina's rating reflects the company's business as Indonesia's second-largest plastic packaging manufacturer, with an estimated of 20%-25% market share. Berlina has over 40 years' experience in the industry. The group's performance benefits from the supporting demographic profile and growing consumptions. Customers include those from the fast-moving consumer goods (FMCG), cosmetics, automotive, and food and beverage sectors.

Established Relationship with Unilever: The company has an established relationship with its key customer, the Unilever group (Unilever NV/Unilever PLC, both rated 'A+'/Stable), since 1971. The Unilever group contributed 53% and 64% of Berlina's sales in 2014 and 1H15, respectively. Fitch views Berlina's reliance on Unilever as a positive point, due to Unilever's creditworthiness and its dominant position in Indonesia FMCG industry. We expect Berlina to continue to supply plastic packaging to Unilever.

Cost Pass-Through Contracts: Berlina's long-term contracts with customers provide relatively stable cash flows. Berlina's customer contracts typically include cost pass-through pricing mechanism, which largely mitigate company's exposure to the fluctuating costs of raw materials through the cycle.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Berlina include:
- Sales volume growth of 1% yoy in 2015F and about 7% per year in 2016F and 2017F
- EBITDA margin of around 16%
- Capex of IDR147bn in 2015 and IDR178bn in 2016
- Dividend payout of 15-25% of net income

RATING SENSITIVITIES
Negative: The defensive nature of its cash flow and stable margins in a difficult operating environment, has led to Fitch re-assessing Berlina's business risk profile. Accordingly, Fitch has revised its rating sensitivities. Developments that may, individually or collectively, lead to negative rating action include:
- Net debt/EBITDA increase to above 3.0x on a sustained basis
- Deterioration in EBITDA margin to below 14% on a sustained basis

Positive rating action is not expected over the medium term, due to Berlina's small operating scale.