Fitch Assigns Perenti's First-Time 'BB' IDR; Outlook Positive

(The following statement was released by the rating agency) Fitch Ratings-Sydney-18 September 2020: Fitch Ratings has assigned Perenti Global Limited a first-time Long-Term Issuer Default Rating (IDR) of 'BB'. The Outlook is Positive. Perenti's rating reflects its position as the leading mining services contractor globally and its prudent financial policy, which is balanced by high jurisdiction risks of its operations across Africa. The rating is underpinned by a stable earnings base from its underground mining contracts and its ability to generate free cash flow (FCF) during weak commodity environment. We expect Perenti will continue to increase its earnings and maintain a conservative level of credit metrics, with its order book reaching around AUD5.4 billion with a near-term pipeline project value of AUD8.8 billion. The Positive Outlook reflects Perenti's expansion into North America and Botswana, which, together with existing contracts in Australia, will reduce its overall exposure to 'B' rated African countries. Key Rating Drivers Stable Cash Flow from Underground Mining: Perenti's underground mining division (the largest division with around 70% EBITDA contribution in FY20) has generated stable cash flow through the cycle. This was evidenced by the division's stable EBITDA contribution over the last decade, especially when compared to its surface mining and investments divisions as well as competitors. The stability is underpinned by the strong cost position of the mines that Perenti serves, the focus on production-related services, as well as the higher barriers to entry and lower capital intensity than surface mining. The underground mining EBITDA enhances the cash flow stability of the Perenti group and Perenti's ability to meet interest payments, even during a commodity downturn. This is in stark contrast to peers with direct exposure to commodity price movements and thus have far more volatile cash flow profiles through the cycle. Conservative Financial Policy: Perenti has a sound record of maintaining conservative financial policies. It has a target leverage ratio - defined by the company as net debt/EBITDA - of less than 2x and has proved its willingness to maintain a strong balance sheet by raising equity to fund growth capex and acquisitions. In addition, the nature of its business model allows the company to reduce its growth capex during commodity downturns, which allows it to generate positive cash flow after capex. Perenti has managed its leverage by undertaking capital management initiatives, including reducing capex, suspending dividends and divesting non-core assets, to return leverage to within its target level. Fitch expects Perenti's leverage - measured by funds from operations (FFO) net leverage - will improve to around 1.0x in FY24 from 1.4x in FY20. The improvement is driven by expected FCF in FY22-FY24. Exposure to Africa: Fitch believes the strong growth pipeline in Australia, North America and Botswana will reduce Perenti's exposure to weaker sovereign countries in Africa. Around 50% of its revenue is derived from Africa, which has high operating and political risks. Perenti terminated two surface mining contracts in Burkina Faso in late 2019 due to a terrorist attack in the region. However, these risks are countered by the company's long history of operation in the region, its diversified operation within Africa, its ability to redeploy assets and its effort to expand into the huge North America market. Perenti's customer base and operations are diversified by mining services (underground, surface and investments), commodity and geography. Thus, Fitch believes Perenti's diversified earnings stream and operational profile reduces the company's exposure to any single counterparty or contract or event in a certain geography. Derivation Summary Perenti's rating reflects its stable cash flow from diversified underground mining services contracts and competitive cost position of the mines it serves. This compares favourably against its peer, Indonesia-based PT Bukit Makmur Mandiri Utama (BB-/Negative), which has a less diversified business model with concentrated and lower quality counterparties. Perenti has better scale, diversified commodity and customer base and credit metrics, but these are countered by its significant exposure to Africa. These factors underscore the one-notch rating differential between the two entities. Downer EDI Limited (BBB/Stable) has better scale, diversified business operations and zero exposure to Africa when compared with Perenti. These factors underscore the three-notch rating differential between Perenti and Downer. Key Assumptions - Strong revenue growth in FY21 and FY22 due to new contract wins and extension of existing contracts. - Group EBITDA margin to be around 20% over the next four years. - Net Capex of around 10%-12% of revenue from FY22-FY24; FY21 net capex estimated at around AUD400 million. - Dividend payout ratio at around 40%-45% of underlying net profit after tax. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Maintain FFO net leverage below 2x for a sustained period; - Derive, at least, 60% of revenue and work-in-hand from investment-grade rated countries on a sustained basis. Factors that could, individually or collectively, lead to negative rating action/downgrade: - Failure to achieve the upgrade sensitivities could result in a return to a Stable Outlook. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Strong Liquidity: Perenti had cash and equivalents of AUD327 million at end-June 2020, and interest-bearing liabilities of AUD782 million, resulting in an interest-bearing net debt position of AUD455 million. Its overall liquidity position improved to around AUD600 million in cash and undrawn facilities, ensuring that the company is well positioned for growth and to withstand COVID-19 uncertainty. Date of Relevant Committee 08 September 2020 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Perenti Global Limited; Long Term Issuer Default Rating; New Rating; BB; RO:Pos Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst James Hollamby, Associate Director +61 2 8256 0347 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 26 Jun 2020) (https://www.fitchratings.com/site/re/10125796) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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