Moodys : Rising costs limit near term rating upside for GT

IQPlus - Moody's Investors Service said today that the decline in 2013 performance for Gajah Tunggal Tbk (P.T.) (GT) does not impact its B2 corporate family rating. GT announced last week that its 2013 sales were down slightly at IDR12.4 trillion from 2012's IDR12.6 trillion and that increasing costs and a weakening Rupiah weighed on its profitability. We expect market conditions to remain challenging in 2014, thus limiting any immediate upside for GT's ratings, which remain well positioned to absorb weaker earnings.

"The decline in GT's 2013 earnings were consistent with our expectations as the mix of rising competition in Indonesia, lower rubber prices and higher transportation costs resulted in a meaningful decline in EBITDA margins" says Brian Grieser, a Moody's Vice President and Senior Analyst. "The rise in costs were exacerbated by a significant decline in the
Rupiah during the second half of 2013".

GT's transportation costs rose roughly 74% in the fourth quarter, as the Government of Indonesia's June 2013 reduction in fuel subsidies were fully absorbed into freight fees charged by transport companies, and increasing local competition, combined with pricing pressure due to lower rubber prices, led to a 2.5x increase in fourth quarter incentive and rebate spending. We expect higher transportation costs to continue to weigh on earnings through the first half of 2014 compared to the first half of 2013 and that GT will continue to spend to maintain its market share throughout 2014, likely through its incentives and rebates.

These pressures were compounded by the decline in the Rupiah in the fourth quarter of 2013 given GT's exposure to USD costs, primarily rubber and interest payments. While the Rupiah has strengthened early in 2014 compared to the USD, it remains well above first half 2013 levels. We expect managing exchange rate volatility will continue to be a challenge in 2014.

Despite these challenges, GT remains well positioned in the B2 rating category given its modest leverage, roughly 3.0x at December 31, 2013, and solid cash generation. Overall, we expect leverage to inch upwards in 2014 but to remain well within our expectations at the current rating.

Further, GT continues to maintain a solid liquidity profile. Cash balances more than doubled in 2013 and its USD reserves are well above its interest requirements over the next two years. GT's annual interest requirements are close to USD39 million and its USD cash balances at December 31, 2013 were almost USD120 million.