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Rating Action:

Moody's downgrades Matahari Putra Prima to B1; outlook stable

20 Dec 2017

Singapore, December 20, 2017 -- Moody's Investors Service has downgraded the corporate family rating of Matahari Putra Prima Tbk (P.T.) (MPPA) to B1 from Ba3.

The rating outlook is stable.

RATINGS RATIONALE

MPPA's rating downgrade reflects continued weakness in the company's operating performance, impacted by sluggish sales, against the backdrop of weak industry demand and heightened competition.

In light of these challenges, in recent months MPPA has embarked on a revised strategy to stabilize performance and preserve cash by cutting back on expansionary capex, and maintaining tighter cost controls. MPPA has also announced plans for a rights issue in early 2018, with the proceeds funding working capital and repaying debt.

"While proceeds from the rights issue will help meet near-term liquidity requirements, we believe a turnaround in operations will likely take at least 12 months to achieve, especially given intense price competition from local minimarts," says Maisam Hasnain, a Moody's Analyst.

Accordingly, Moody's expects MPPA's credit metrics to remain stretched over the next 12-18 months, with adjusted EBIT to interest below 1.0x and adjusted EBIT margin below 2%. Furthermore, as profit margins are fairly thin, operating performance remains susceptible to even small changes in consumer sentiment and demand.

MPPA's strategy in recent years — focused on inventory rationalization and increased sales growth through its SmartClub wholesale outlets — has not been sufficient to turn around performance.

For the 12 months ended 30 June 2017, MPPA's adjusted EBIT margin fell to 1% from 3.9% for full-year 2015, due to lower revenue generation — including year-on-year revenue declines in its last four consecutive quarters — and actions taken to refresh slow-moving inventory and excess stock.

In addition, adjusted debt to EBITDA increased to 4.4x for the 12 months to 30 June 2017 from 3.0x in 2015, and adjusted EBIT to interest fell to 0.5x from 2.1x during the same period, due to lower profitability and increased debt raised to fund operations. Consequently, MPPA's financial profile is no longer in line with Moody's expectations for its Ba3 rating.

Nonetheless, MPPA's B1 rating reflects its leading market position in the fast-moving consumer goods segment and its proven expansion capabilities.

"Over the longer term, MPPA remains well-positioned to benefit from Indonesia's growing middle-income population and the urban consumers' lifestyle shift to hypermarkets from traditional wet markets," adds Hasnain, who is also Moody's Lead Analyst for MPPA. "Hypermarkets also meet primary consumer needs, which are more stable and less susceptible to economic volatility."

The rating outlook is stable, reflecting Moody's expectation that MPPA will maintain its leading market position and execute on its strategy to gradually improve its financial metrics over the next 12-24 months.

A near-term rating upgrade is unlikely. However, upward rating momentum could build over time, if the company experiences a sustained improvement in operating performance with stronger financial metrics, while maintaining a prudent policy with respect to shareholder returns.

Credit metrics indicative of a rating upgrade include: (1) adjusted debt to EBITDA of below 3.5x; and (2) adjusted EBIT to interest of more than 2.0x on a sustained basis.

On the other hand, MPPA's rating could face downward pressure if: (1) its strategies to revive operational performance are unsuccessful; (2) there is evidence of cash leaking from MPPA to fund affiliated companies, for example, through inter-company loans, aggressive cash dividends or investments in affiliates; or (3) MPPA adopts more aggressive shareholder return policies, thereby weakening its liquidity position or causing it to incur additional debt.

Credit metrics indicative of a rating downgrade include: (1) an inability to reverse declining operating margins; (2) adjusted debt to EBITDA above 5.0x; and (3) adjusted EBIT to interest below 1.0x on a sustained basis.

The principal methodology used in this rating was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Matahari Putra Prima Tbk (P.T.) (MPPA) is a leading retailer in Indonesia with multiple retail formats. At 30 June 2017, the company operated 117 Hypermarts, 26 Foodmarts, 30 Express stores, 112 Boston Health & Beauty and 4 SmartClub wholesale outlets in more than 68 Indonesian cities.

PT Multipolar Tbk, a holding company that owns majority stakes in retail, technology, media, and real estate investment companies in Indonesia and China, owns a 50.2% stake in MPPA. Temasek Holdings (Private) Limited (Aaa stable), through its subsidiary, Anderson Investment Pte. Ltd., has exchangeable rights in MPPA. If such rights are exchanged in full, they represent a 26.1% stake in MPPA.

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.

Maisam Hasnain
Analyst
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

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