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Region: Indonesia
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Fundamental View
AS OF 04 Jun 2024PLN enjoys extremely strong ties with the Government of Indonesia (GoI) given its critical policy role of electrifying the nation.
We see a modestly poorer FY24 credit outlook as resilient domestic power demand, flattish power tariffs and insulation from input cost volatility are offset by sizable capex for coal and renewable capacity additions.
President Prabowo’s plans to tamp down on PLN’s monopoly could induce longer-term regulatory uncertainties.
Business Description
AS OF 04 Jun 2024- PLN is involved in the entire electricity value-chain, from power generation, to transmission, distribution and retail.
- It alone accounts for 76% (~47 GW) of Indonesia's generation capacity (of which 8 GW is renewable capacity), while IPPs provide the remainder.
- The company controls and operates the entire transmission and distribution network in the country. It is the sole buyer of electricity produced by IPPs, through power purchase agreements (PPAs).
- It sells electricity to well-diversified off-takers – 41% to households, 25% to industrial customers, 21% to businesses and 12% to others.
- Since 2015, the GoI has gradually implemented monthly tariff adjustments for 13 customer groups, so that rates charged to customers are better matched with production costs.
- However, under the Public Service Obligation (PSO), the company will continue to sell electricity at subsidized rates of 50% to 450-volt amperes (VA) power households and 25% to 900 VA power households. The GoI subsequently reimburses the company for the difference between the subsidized tariff rate and production cost, typically within 2-3 months.
Risk & Catalysts
AS OF 04 Jun 2024The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during major events such as COVID-19 pandemic.
In order to increase the country’s electrification ratio to 97%, the company had been mandated by the GoI to develop large electricity capacities through the Fast Track II and 35,000 MW Programs. Implementation of such complex programs has required significant capital expenditure, which has led PLN’s FCF to fall deep into the red in recent years and created a funding gap.
The success of the above programs is also contingent on the company’s ability to source coal cheaply, select quality contractors, acquire land rights and receive adequate subsidy reimbursements from the GoI.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Key Metrics
AS OF 04 Jun 2024| IDR bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 32.5% | 32.2% | 29.7% | 28.9% | 27.8% |
| Net Debt to Book Cap | 29.1% | 28.2% | 26.9% | 25.2% | 23.7% |
| Debt/Total Equity | 48.1% | 47.4% | 42.2% | 40.7% | 38.5% |
| Debt/Total Assets | 28.2% | 28.1% | 25.7% | 24.6% | 23.4% |
| Gross Leverage | 5.6x | 5.5x | 5.0x | 4.2x | 4.3x |
| Net Leverage | 5.0x | 4.8x | 4.6x | 3.7x | 3.7x |
| Interest Coverage | 2.6x | 2.5x | 3.2x | 4.3x | 3.6x |
| EBITDA Margin | 27.8% | 29.0% | 28.0% | 30.1% | 26.4% |
CreditSights View
AS OF 04 Jun 2024We have an Underperform recommendation on PLN. Its shorter-dated and longer-dated bonds trade only 1-20 bp and 15-33 bp wider than Pertamina’s similar maturity bonds respectively. We see a fair differential of 50-60 bp wider given PLN’s weaker net leverage, smaller EBITDA, higher coal-related ESG risks, poorer FY24 credit outlook, and potential longer-term unfavorable regulatory changes that could be implemented by Indonesia’s new Presidential candidate. We remain comfortable with its resilient credit profile aided by healthy domestic power demand amid flattish power tariffs, and good insulation from thermal coal cost volatility (given PLN has access to domestic coal at a maximum price of $70/ton). Capex for coal and renewable capacity additions could strain FCF and credit metrics.
Recommendation Reviewed: June 04, 2024
Recommendation Changed: December 13, 2023
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Fundamental View
AS OF 12 Dec 2023Pertamina enjoys very strong linkages with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress.
Slightly higher YoY FY24E Brent crude prices could lift upstream margins and overall EBITDA (given the upstream business accounts for >80% of consolidated EBITDA).
Although leverage typically remains low, Pertamina incurs large capex spending that could pressure its free cash flow generation.
High persisting dividend outflows could restrain free cash flow improvements.
Business Description
AS OF 12 Dec 2023- Pertamina is involved in a broad range of upstream and downstream oil, gas, geothermal and petrochemical operations.
- In the upstream sector, it engages in the exploration, development and production and supply of crude oil, natural gas and geothermal energy.
- As for the downstream sector, the company carries out refining, marketing and distribution of oil, gas, fuel products and petrochemical and other non-fuel products.
- As of 31 December 2022, its total proved oil reserves stood at ~1,289 mmbbl (mn barrels of oil) and gas reserves stood at ~817 mmboe (mn barrels of oil equivalent). Its average daily oil and gas production was ~967,000 boe per day in FY22. The company owns and operates 6 refineries in Indonesia.
- Under the Public Service Obligation (PSO) mandate, Pertamina is responsible for providing certain grades of motor gasoline, automotive diesel oil, kerosene and LPG at subsidized prices. The subsidized retail price is often times lower than the cost of production, creating a shortfall, for which it receives reimbursements from the GoI.
Risk & Catalysts
AS OF 12 Dec 2023Pertamina’s profitability is materially affected by volatility in oil & gas prices. Prolonged periods of low oil prices could hurt upstream earnings that form the bulk of overall EBITDA (>80%).
As retail prices of certain fuel products are regulated, realized prices may be below its cost of sales.
Pertamina has to initially absorb the shortfall between the regulated retail price and the cost of producing and distributing certain fuel products. If the price of crude oil exceeds the price ceiling set by the GoI, the company may receive insufficient subsidy reimbursements.
Capex typically remains elevated and which pressurizes its free cash flow generation.
Key Metrics
AS OF 12 Dec 2023| $ mn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Debt to Book Cap | 40.0% | 36.2% | 38.5% | 41.2% | 42.1% |
| Net Debt to Book Cap | 21.5% | 22.4% | 18.9% | 21.9% | 12.5% |
| Debt/Total Equity | 66.6% | 56.8% | 62.5% | 70.0% | 72.7% |
| Debt/Total Assets | 30.5% | 26.4% | 28.3% | 29.9% | 30.8% |
| Gross Leverage | 2.1x | 2.2x | 2.4x | 2.5x | 1.9x |
| Net Leverage | 1.2x | 1.3x | 1.2x | 1.3x | 0.6x |
| Interest Coverage | 10.3x | 8.1x | 7.8x | 8.7x | 11.2x |
| EBITDA Margin | 15.9% | 14.9% | 19.9% | 16.0% | 16.7% |
CreditSights View
AS OF 09 Jan 2024We have a Market perform recommendation on Pertamina. We think Pertamina should trade 50-60 bp tighter than Indonesian SOE PLN as Pertamina’s lower net leverage and less material ESG concerns (PLN is still largely a thermal coal power producer) outweigh a weaker FY23 upstream oil price outlook. We remain comfortable with Pertamina’s credit profile aided by its strong government backing and expectations of slightly higher YoY FY24 average Brent crude prices that could support upstream margins (FY22 credit metrics: 1.9x/0.6x). Capex remains elevated amid a ramp up in energy transition goals.
Recommendation Reviewed: January 09, 2024
Recommendation Changed: May 16, 2023
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Fundamental View
AS OF 26 Oct 2023Bank Rakyat Indonesia (BRI) is rated Baa2 (sta)/ BBB- (sta)/ BBB (sta). As the second largest bank in Indonesia that is majority-owned (53.19%) by the Indonesian government, and key role in servicing the ultra-micro and micro segments, we expect a very high likelihood of government support in times of need.
BRI’s credit strength has been its very high margins (>7%; rose after consolidating Pegadaian and PNM) and consequently, ROE, as well as capital buffers (>20% CET 1 ratio), which are ahead of its country peers and among the highest in APAC.
The bank has a leading franchise in the country’s micro and small commercial segments with a long operating track record. Well managed credit costs have in turn helped to support its high margins.
Business Description
AS OF 26 Oct 2023- The history of Bank Rakyat Indonesia can be traced back to 1895; it is now the second largest bank in Indonesia by assets.
- BRI was listed on the Jakarta Stock Exchange in 1992, now the Indonesia Stock Exchange in 2003. The Indonesian government held a 53.2% stake in the bank as of end-September 2023. Foreign investors hold 36.6% of the bank's shares and domestic investors 10.1%.
- Its core business focus is on the ultra-micro, micro and small commercial segments, which now account for just over two-thirds of its total loan book.
Risk & Catalysts
AS OF 26 Oct 2023BRI’s high exposure to ultra-micro and micro (~47% of loans) and small commercial loans (18%) leads to higher credit costs compared to its peers. Asset quality within the COVID restructured book (mainly small and micro loans) has not trended as well as the bank’s earlier guidance, but the higher margins generated continue to provide more than sufficient room for credit costs to be absorbed. We are comfortable with the credit given its very high capital buffers.
BRI’s interest margins have been resilient thanks to its increased focus on the higher yielding micro segment so its returns have continued to be strong. It is on track to exceed its FY23 NIM guidance.
The Indonesian economy continues to be on good recovery momentum and is set to receive a boost from election related spending in 2H23, which should help to keep general asset quality and credit costs in check, as well as aid loan growth, which has been impacted by tight liquidity conditions in the first half.
Key Metrics
AS OF 26 Oct 2023| IDR bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| PPP ROA | 4.8% | 4.2% | 4.7% | 5.2% | 5.7% |
| ROA | 2.5% | 1.2% | 1.9% | 2.9% | 3.2% |
| ROE | 17.7% | 8.6% | 12.0% | 17.4% | 19.4% |
| Equity/Assets | 14.6% | 14.1% | 17.2% | 16.0% | 16.6% |
| CET1 Ratio | 21.7% | 20.1% | 26.2% | 24.5% | 26.3% |
| NPL Ratio | 2.80% | 2.88% | 3.00% | 2.67% | 3.07% |
| Provisions/Loans | 2.47% | 3.43% | 3.47% | 2.51% | 2.59% |
| LDR | 88% | 91% | 92% | 87% | 97% |
CreditSights View
AS OF 26 Oct 2023BRI has become the 2nd largest bank in Indonesia by assets, having been overtaken by Bank Mandiri after the latter’s sharia business consolidation. About 47% of its consolidated loan book consists of micro loans and another 18% of small commercial loans, leading to its higher credit costs than peers. Asset quality within the COVID restructured book has not trended as well as management had earlier hoped for, but the higher margins that BRI generates continue to provide more than sufficient room for credit costs to be comfortably absorbed. BRI and its country banking peers also have the highest capital ratios in the region (26.3% CET1 ratio for BRI) and are therefore in the position to absorb losses. We like BRI because of its very strong profitability and capital. We maintain our M/P reco.
Recommendation Reviewed: October 26, 2023
Recommendation Changed: July 08, 2022
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