September 23, 2021 8:00 AM

Indika's credit profile will continue to improve

buy

Indika Energy (- / Ba3 / BB-) posted strong financial results for 2Q21, driven by strong growth in coal prices. We expect earnings to remain strong in the coming quarters, given the lagging impact of rising coal prices on the company's financials. Indika Energy reported strong EBITDA, which rose to $ 179 million, up 58% qoq and an impressive 160% yoy, mainly driven by the coal business. We have revised our forecast for Newcastle coal price upward to $ 100 per tonne in 2021 and to $ 90 per tonne in 2022. We estimate that the EBITDA of Kideco, the company's main operating asset, will increase to $ 550 million in 2021 and $ 400 million in 2022, accounting for 80% of the group's total. Overall, we expect Indika's EBITDA to reach $ 619 million in 2021 and $ 486 million in 2022, which will help reduce net leverage to 1.3x. We expect cash to rise to $ 900 million by the end of 2022.

YTM

6.6%

RISK

- / Ba3/ BB-

DURATION

3.4

Overall, we still believe that Indika's credit history will continue to improve in the near future, but there are also several medium-term risks, such as new business risks associated with the business diversification plan, as well as a significant presence in the dollar bond market. First, coal mining will remain Indika's core business over the medium term, accounting for about 80% of revenues. Second, Indika has the largest dollar-denominated debt capital market among Indonesian coal miners, with $ 1.25 billion in bonds outstanding. As more institutional investors, including those from Asia, reduce their involvement in the coal sector, the company's investor base may continue to decline. Nevertheless, strong growth in the company's profits will help support the rise in bond prices, therefore, the potential for declining bond yields remains. Among the Indika Energy Eurobonds, we highlight the secured issue with maturity in 2025 (ISIN- USY39690AA30), which offers a dollar yield of 6.6% with a duration of 3.4 years.

Indika Energy is an energy company. The Company provides energy services, energy resources and infrastructure, primarily in the areas of coal production, engineering, procurement and construction services and power generation services.