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Rating Action:

Moody's changes Spindo's outlook to negative; affirms B2 CFR

22 Aug 2018

Singapore, August 22, 2018 -- Moody's Investors Service changed the rating outlook on Steel Pipe Industry of Indonesia Tbk (P.T.)'s (Spindo) to negative from stable.

At the same time, Moody's affirmed Spindo's B2 corporate family rating (CFR).

RATINGS RATIONALE

"The change in outlook to negative reflects Moody's expectation that Spindo's gross margin will remain under pressure due to steel price volatility over the next 12-18 months, resulting in elevated leverage and weak interest coverage," says Brian Grieser, a Moody's Vice President and Senior Credit Officer.

As steel accounts for 85%-95% of its cost of goods sold, Spindo is exposed to fluctuations in global and domestic steel prices. Although the company uses a cost plus pricing model, it has been unable to fully pass on the increase in steel prices to its customers on a timely basis. As a result, Spindo's gross margins have fallen to 15% for the 12 months ended 30 June 2018 from 18% in 2017 and 25% in 2016.

While Moody's expects the company's gross margins to stabilize around 15% over the next 12-18 months as the company revises its selling prices to recover the higher steel costs, leverage - as measured by adjusted debt/EBITDA - will remain in 5.5x-6.5x range which is high for its B2 rating.

"Moreover, Spindo's debt levels are elevated due to its high working capital investment needs and reliance on short-term funding," adds Grieser, who is also Moody's Lead Analyst for Spindo.

Spindo maintains a large inventory balance, because around 65% of its raw materials are imported in bulk and half of its pipes are built-to-stock. While the company has been actively managing inventory levels down since Q3 2017, inventory days were still high at 265 days as of 30 June 2018.

Moody's expects Spindo to manage down its inventory levels over the next 12-18 months, as it shifts more of its raw material purchases to local suppliers, which should generate some cash flows to allow for marginal debt reduction.

In addition, Moody's anticipates that capital expenditures will remain low in 2018 and 2019, alleviating any additional pressure on cash flow generation. Capital expenditures will be allocated largely to the construction of warehouses to expand Spindo's direct sales reach in Indonesia (Baa2 stable).

Spindo's liquidity position is weak, as 70% of the company's total debt - or IDR2.2 trillion - comes due in the next 12 months. Nonetheless, the company has a track record of rolling over its short-term working capital facilities. In addition, the facilities are secured by inventories and receivables which amounted to IDR 2.8 trillion and IDR754 billion, respectively, as of 30 June 2018, providing a 1.6x coverage over short-term debt.

Given the negative rating outlook, Spindo's CFR is unlikely to be upgraded over the next 12-18 months. However, the outlook could return to stable if the company manages to stabilize EBITDA margins in the mid-to-high teens, while also improving inventory turnover levels.

On the other hand, the ratings could be downgraded if margins fail to stabilize or improve, inventory turnover levels weaken from current levels and/or short-term borrowings exceed inventory levels. In addition, reduced financial flexibility as a result of weaker operating performance could also lead to a downgrade.

Metrics indicative of downward rating pressure include (1) leverage level in excess of 5.0x over an extended period; and/or (2) short-term borrowings to inventories in excess of 1.0x.

The principal methodology used in this rating was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Steel Pipe Industry of Indonesia Tbk (P.T.) (Spindo) is a leading steel pipe manufacturer in Indonesia, producing a variety of customized and standardized carbon and stainless steel pipes and pipe-related products and services. Spindo's products are used by customers in the construction, infrastructure, utilities, oil and gas, furniture and automotive industries, and are sold under the Spindo and Tetsura brands.

Spindo operates six manufacturing facilities in Indonesia, with a total of 37 steel pipe production lines.

The company listed on the Indonesia Stock Exchange in February 2013. It is 55.94%-owned by PT. Cakra Bhakti Para Putra (unrated) and 44.06% owned by public shareholders.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 ratings tab on the issuer/entity page for the respective issuer on www.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.

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

Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Brian Grieser
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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