20211124-招银国际-INDYIJ_–_Indika_Energy_Initiation_12页_862kb

CMBI Credit Commentary: Indika Energy Summary

Core Content

This credit commentary provides an analysis of Indika Energy (INDYIJ), a leading coal miner in Indonesia, with a focus on its credit profile, business operations, and financial performance. CMBI Fixed Income has initiated a "Buy" recommendation on its USD bonds due in 2024 and 2025, citing favorable coal price trends, stable leverage, and a prudent diversification strategy as key factors.

Main Points

• Credit Rating and Bond Performance: Indika is rated Ba3/Stable. Its bond price is expected to remain well-supported among Indonesian BB-rated peers. The bonds are expected to outperform in terms of yield to maturity (YTM) compared to peers such as ADROIJ '24 and JPFAIJ '26.

• Bond Details:

  • INDYIJ 5.875% '24 at 100.7 (YTM ~5.6%)
  • INDYIJ 8.25% '25 at 104.3 (YTM ~7.0%)

• Kideco's Role: Kideco, a subsidiary of Indika, is a major contributor to the company's earnings. It operates an open-pit coal mine in East Kalimantan with a reserve life of 15 years. Kideco's production volume is expected to be between 34-35 million tons in 2022, and it contributes 60%–85% of Indika's EBITDA.

• License Renewal: The Indonesian government's Mining Law No.3 of 2020 allows for a 20-year extension of CCoW licenses. Kideco's current license will expire in March 2023 and is expected to be extended to an IUPK license. Arutmin, a similar company, successfully extended its license in November 2020, setting a precedent for Kideco.

• ESG Considerations: While ESG concerns may affect Indika's bond price, the company is expected to roll over existing bank loans with foreign banks and has no immediate refinancing need until November 2024.

• Financial Performance:

  • Indika's revenue is forecasted to remain high in 2022 at USD2.7 billion.
  • EBITDA is expected to increase to USD700 million–USD800 million in 2021, and taper to USD500 million–USD600 million in 2022.
  • Operating cash flow is expected to be USD400 million–USD500 million in the next two years, sufficient to cover gross capex, interest payments, and taxes.

• Debt and Credit Metrics:

  • Gross debt will remain stable in the next two years.
  • Debt/EBITDA is projected to trend down to 2.5x in 2021 and 3.5x in 2022, significantly lower than 8x in 2020.
  • EBIT/Interest coverage ratio is expected to improve to 4x and 3x in 2021 and 2022, respectively, up from -0.2x in 2020.
  • These metrics are expected to help retain Indika in its current Ba3 rating.

• DMO Impact: The Domestic Market Obligation (DMO) requires Indonesian coal miners to supply at least 25% of their output domestically. Kideco supplies around 33% of its coal domestically, which helps in maintaining stability in the domestic power sector. The DMO could limit profitability in upcycles, but Indika can boost production by 10% if DMO is fulfilled.

• Diversification Strategy: Indika aims to increase non-coal revenue to 50% and non-coal profit to 25% within 5 years. The company has acquired the Nusantara Resources – Awak Mas Gold project, which is expected to begin production by the end of 2024. The project has probable reserves of 1.46 million ounces of gold and a mine life of 16 years.

• Financial Health:

  • The project has an all-in production cost of USD875 per ounce, below the global average of USD998 per ounce.
  • The estimated NPV is USD500 million based on a gold price assumption of USD1,700 per ton.
  • The project is expected to contribute to low-teens% of Indika's gross profit in 2025.

• Risk Management:

  • Indika has a track record of prudent financial policy and has historically made acquisitions during periods of strong operating cash flow.
  • Execution risk is contained due to the use of its subsidiary Petrosea for part of the mining work.
  • The company has a low maintenance capex of USD15 million and is budgeting USD233 million in capex for the project over the next three years, 70% of which will be financed by bank loans.

Key Information

• Kideco's Coal Price Sensitivity: An increase of USD10 per ton in the average selling price (ASP) above USD35 per ton would raise Kideco's annual EBITDA by USD250 million.

• Coal Price Recovery: In 1H2021, Kideco's ASP rose to USD49 per ton from USD40 in 1H2020, with cash EBITDA per ton recovering to USD13.3 from USD7.2.

• ESG Compliance: Indika complies with all Indonesian environmental laws and won a Gold Proper National Award in 2020 for environmental excellence.

• Bond Yield Comparison:

  • INDYIJ '24: YTM ~5.6%
  • INDYIJ '25: YTM ~7.0%
  • ADROIJ '24: YTM ~3.3%
  • JPFAIJ '26: YTM ~4.3%
  • GERSP '26: YTM ~8.2%
  • DOIDIJ '26: YTM ~7.8%

• Future Outlook: Indika is expected to benefit from the current coal price upcycle and its diversification strategy, which should reduce reliance on coal and improve overall financial resilience.

Financial Highlights

Conclusion

Indika Energy is positioned as a quality credit in the Indonesian high yield market, with a strong coal business and a strategic diversification plan. The company is expected to benefit from favorable coal price trends and its long-term coal reserves, while its financial structure is improving, with lower debt-to-EBITDA and better interest coverage. The diversification into gold production is expected to reduce reliance on coal and provide additional revenue streams, although execution risk remains a consideration. The company's ability to manage its financial obligations and its compliance with environmental standards further support its credit profile.