Fitch Ratings has affirmed Australia-based Perenti Global Limited's Long-Term Issuer Default Rating at 'BB+'.
The Outlook is Stable.
The affirmation reflects Perenti's strong financial performance in the first half of the financial year ending June 2023 (1HFY23). The results demonstrated operational improvements due to better business conditions and revised contract rates, which offset industry-wide inflationary pressure and the termination of low-profit legacy contracts. The company's work-in-hand (WIH) at end-June 2022 also remained steady while it continued the shift towards low-risk mining jurisdictions.
The Stable Outlook reflects Fitch's expectation Perenti's operational performance will be stable over the medium term and leverage will improve, which has created solid headroom for the rating's negative sensitivities.
Key Rating Drivers
Improving Jurisdictional Risk Profile: We expect revenue from investment-grade jurisdictions to continue making up more than 60% of Perenti's revenue. The increase comes after it won and extended several contracts from lower-risk countries and recently concluded contracts in Egypt and Mali. Its strategy is to limit exposure to frontier markets and bring its operating risk profile in line with that of peers. It generated around 70% of WIH and 61% of revenue from Australia (AAA/Stable), United States of America (AAA/Stable), Canada (AA+/Stable) and Botswana in 1HFY23.
Stable Cash Flow from Underground Mining: Perenti's underground mining division makes the largest contribution to EBITDA, at around 67% (before group function cost) in 1HFY23, and allows stable cash flow through the cycle. This is evident from the division's steady EBITDA contribution over the last decade compared with the company's surface mining and investment divisions as well as against competitors.
The division's stability provides a buffer against cyclical commodity prices, and is underpinned by the low-cost position of the mines that Perenti serves, a focus on production-related services and the higher barriers to entry and lower capital intensity than surface mining.
Leading Market Position in Australia: Perenti is the second-largest mining-service company in Australia with around AUD1.2 billion in revenue from the country in FY22. Its Australian WIH was AUD3 billion at end-June 2022 (AUD3.2 billion at end-June 2021), or almost half of its order book of AUD6.5 billion. We believe mining activity in Australia will continue to gradually increase, although it will be cyclical. This will support stable demand for Perenti's services and offset declines in revenue in high-risk mining jurisdictions, where the company plans to reduce operations.
Conservative Financial Policy: Perenti is targeting a reduction in its leverage, which it defines as net debt/EBITDA, to less than 1x. The strong first-half results mean it now expects to achieve the target by FYE23 (1HFY23: 1.1x). We believe the successful deleveraging and commitment to maintaining a conservative financial profile will better position the company to withstand commodity-price downturns.
Perenti maintains conservative leverage metrics through capital-management initiatives, such as limiting capex, suspending dividends and divesting non-core assets. Fitch expects Perenti's EBITDA net leverage to improve to 1.0x in FY23 and remain at or below that level over at least the next few years on higher EBITDA generation.
Derivation Summary
Perenti's rating reflects stable cash flow from diversified underground-mining service contracts and a competitive cost position at the mines it serves. This compares favourably against Indonesia-based peer, PT Bukit Makmur Mandiri Utama (BB-/Stable), which has a less diversified business model due to concentrated and lower-quality counterparties. Perenti has better scale, as Australia's second-largest mining contractor, as well as superior credit metrics and diversified commodity exposure and customer base. These factors underscore the two-notch rating differential between the two entities.
Thiess Group Holdings Pty Ltd (BBB-/Stable), the world's largest mining-service company, has better scale, a wider profit margin and no exposure to countries with high sovereign risks in comparison with Perenti. However, this is countered by Thiess' more volatile cash flow profile due to its exposure to mines with weak cost positions. Both companies have conservative leverage profiles. These factors underscore the one-notch rating differential between the two entities.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue growth of 15% in FY23 due to new contract wins and the extension of existing contracts, and flat revenue thereafter
Fitch-adjusted group EBITDA margin of around 18% over the next four years
Net capex of AUD320 million in FY23 and 12% of revenue on average thereafter
No new acquisitions or divestments assumed
Dividends of 25% of net profit from FY25 as net leverage falls below 1x
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improved scale to be in line with higher-rated peers
Fitch-adjusted EBITDA margin rising above 20% for a sustained period (FY22: 16.2%)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA net leverage rising above 1.7x for a sustained period (FY22: 1.3x)
Decline in revenue and WIH from stable mining jurisdictions to below 60% for a sustained period
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 AUD322.5 million at end-December 2022 (FYE22: AUD349.5 million), against interest-bearing liabilities of around AUD859 million (FYE22: AUD861.5 million). The company's liabilities included USD433 million (FYE22: USD450 million) in senior unsecured debt and a AUD420 million revolving credit facility, of which AUD205 million was undrawn at end-December 2022. The next material maturity is in October 2025.
Issuer Profile
Perenti is a leading global provider of contract and other mining services. Perenti has become one of the largest mining-service companies listed on the Australian Securities Exchange since operations started in 1987.
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
PERENTI LIMITED 
