OREANDA-NEWS. Fitch Ratings Indonesia has published PT Astra Otoparts Tbk's (AUTO) National Long-Term Rating at 'AA-(idn)'. The Outlook is Stable. At the same time, the agency has assigned a rating of 'AA-(idn)' to AUTO's proposed issue of up to IDR800bn of medium-term notes (MTN).

AUTO's National Long-Term Rating includes a one-notch uplift due to its strong strategic and operational links with its 80% shareholder, PT Astra International Tbk (Astra), in line with Fitch's Parent and Subsidiary Linkage methodology. AUTO's standalone 'A+(idn)' profile is underpinned by its robust business profile and solid credit metrics. It has a diverse range of products, strong brand image and earnings diversification from its growing trading division, while maintaining healthy levels of debt relative to earnings.

The proposed MTN are rated at the same level as AUTO's National Long-Term Rating as the bonds would constitute senior unsecured obligations of the company, which has a reasonably low level of secured debt relative to its EBITDA. AUTO plans to use the proceeds from the issuance to fund working capital.

'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.

KEY RATING DRIVERS

Market Leader; Resilient Income: AUTO is the largest automotive parts manufacturer in Indonesia by revenue and capacity, while its Shop & Drive chain is the largest auto parts retailer with 363 outlets at end-2015. AUTO is a market leader in several product categories - notably in the battery and shock absorber markets. AUTO is both an original equipment manufacturer (OEM) and replacement equipment manufacturer (REM). This diversification supports AUTO's business profile as after-sales REM demand is more resilient and helps to offset any weakness in demand for new equipment.

Trading Offsets Manufacturing Weakness: AUTO's manufacturing business, which supplies OEM components to auto makers and accounts for about 60% of total revenue, is under pressure because auto sales in Indonesia declined in 2015 and are only just bottoming out. However, its trading division, which provides replacement parts, has proven to be more resilient - revenue in this segment rose 4% in 2015 and trading's share of total revenue rose to 45% in 2015 from 41% in 2014. Fitch expects trading to account for a greater share of revenue as recovery in auto sales is likely to be gradual while the demand for replacement parts is relatively resilient.

Robust Financial Profile: AUTO's net debt/EBITDA stood at 0.4x at end-2015, with FFO-adjusted leverage at just 1.3x and fixed-charge coverage at 6x. We believe this conservative capital structure is sustainable as the company plans to scale back on expansion over the next two to three years. However, the company's high annual capex requirement of IDR500bn-1trn will restrict free cash flow. AUTO's IDR2.8trn of unused committed facilities at end-2015 is ample to service maturities due in the short term.

Parental Support: We believe there are strong operating and strategic linkages between AUTO and Astra. These include reputational risks from carrying the same brand name, a significant degree of overlap in board composition, and integration of AUTO's components in Astra's automotive business, which spans manufacturing, distribution, and auto-financing activities.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for AUTO include:

- gradual recovery in Indonesia's automotive sales from 2017

- oil price assumption according to price deck, with 90% correlation between plastic and oil prices (2016: USD35 per barrel (b), 2017: USD45/b, 2018: USD55/b, 2019: USD65/b)

- lead prices according to BMI Research forecasts (2016: USD1,800 per tonne, 2017: USD1,850/t, 2018: USD1,900/t, 2019: USD1,950/t)

- steel according to BMI Research forecasts (2016: USD490/t, 2017: USD510/t, 2018: USD525/t, 2019: USD540/t)

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- free cash flow turning positive on a sustained basis

- improvement in EBITDA margin to 9% (2015: 7%) on a sustained basis

- strengthening of relationship with or support from Astra.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- weakening of linkage to or support from Astra or significant weakening in Fitch's assessment of Astra's credit profile

- FFO net leverage increasing to above 2.0x (2015: 0.36x) on a sustained basis