SPINDOSpectroscopic Potentials Adjusted Intermediate Neglect of Differential Overlap
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The downgrade of Spindo's National Long-Term Rating reflects the company's weakening credit profile, which is consistent with 'BBB(idn)' category ratings.
Weak 2017, Risks to Recovery: We expect mid-teen sales volume growth and a slight margin improvement in 2018, but continually high raw material prices and US dollar appreciation could hamper a sustained recovery in Spindo's sales volume, which rebounded by 24% yoy in 1Q18 off a weak base.
Spindo's EBITDA dropped by 18% in 2017, after sales volume fell by 11% and EBITDA per tonne of sales by 8% in US dollar terms, mainly due to higher input steel prices, with international hot-rolled coil prices jumping by more than 30%.
Strong Domestic Position; Small Globally: Spindo is small compared with global peers, although its domestic scale allows it to manufacture a wide range of products with better cost efficiency than local competitors.
Spindo significantly reduced its inventory to 284 days in 2017, from 350 days in 2016, and shortened its working-capital cycle by around 100 days.
Moderation in Capex: Spindo does not plan to increase its production capacity and is looking to incur mainly maintenance-related capex over the next two to three years due to its significant unutilised capacity.
Deleveraging Likely, but Risks Remain: We expect Spindo's leverage to moderate to below 5.0x by 2018 and to below 4.0x in 2019 and for Spindo to have positive free cash flow in 2019.
Global Fitch-rated integrated steel producers enjoy a better business profile than Spindo on account of larger scale, more product diversity and a higher degree of vertical integration, resulting in most of them being rated in the higher 'BB' category.
Its leverage is much higher than that of Spindo, at around 7.0x in 2017.
Spindo's National Long-Term Rating can be compared with that of PT Berlina Tbk (A-(idn)/Stable) and PT Sulfindo Adiusaha (BBB(idn)/Stable).
Both Aneka Gas and Spindo have a diversified customer base, as well as a comparable leverage profile and market position.