Rating Action Overview

• Perenti Ltd.'s credit metrics are improving as the company ramps up client projects amid the current favorable gold market cycle. In addition, the predominantly scrip-based acquisition of DDH1 Ltd. in October 2023 adds to the group's scale and consolidates Perenti's status as a leading mining services contractor.
• We believe Perenti has greater capacity to navigate adverse commodity price cycles as its credit metrics improve. This is underpinned by its financial policy, which aims for a company-defined net leverage of below 1.0x (this translates to about 1.5x S&P Global Ratings' adjusted gross leverage), coupled with the scale benefits gained from the DDH1 acquisition.
• Accordingly, we revised the rating outlook on Perenti to positive from stable. At the same time, we affirmed our 'BB' issuer credit rating, our 'BBB-' issue rating (recovery rating of '1') on the company's A$420 million senior secured bank facilities, and our 'BB' issue rating (recovery rating of '3', previously '4') on the company's US$433 million senior unsecured notes.
• The positive outlook reflects our expectation that Perenti's commitment to its financial policy will enable the company to sustain an S&P Global Ratings' adjusted ratio of debt to EBITDA at about 1.5x or less. This, together with the successful integration of DDH1, an increase in its work-in-hand while maintaining operating margins and continued progress in reducing its exposure to high-risk jurisdictions could facilitate an upgrade to 'BB+' in the next 12-18 months.

Rating Action Rationale

We forecast Perenti will book double-digit revenue and earnings growth for fiscal 2024 (ending June 30, 2024), driven by the DDH1 acquisition and execution of the group's existing contracts.  The acquisition will add about A$110 million of adjusted EBITDA to the group, according to our estimates. At the same time, the company is set to benefit from the transition to the operating phase of prior contract wins.

Perenti "front-loaded" capital expenditure (capex) over the past two years to establish the equipment needed across various growth contracts. In fiscal years 2021 and 2022, the company invested material gross capex of A$278.6 million and A$467.9 million, respectively. Subsequently, these contracts have transitioned into a phase of accelerated activity, leading us to expect increased earnings for the group.

Perenti's robust fiscal 2023 performance, with adjusted EBITDA growing by 34.5%, demonstrates the group's execution of its business model. We anticipate adjusted EBITDA growth of about 18% and 8% in fiscal years 2024 and 2025, respectively. Our base case assumes the company's successful integration of DDH1 and about A$20 million in post-tax synergies over the next two years.

The acquisition of DDH1 in October 2023 increases the group's scale and decreases exposure to higher risk jurisdictions. In our view, the larger scale of the group's portfolio improves the capacity to manage commodity cycle downturns. Post-acquisition, Perenti will have higher revenue exposure to tier-1 jurisdictions. We expect the group's exposure to higher-risk West Africa and Southern Africa (excluding Botswana) to fall to about 32% from 38% as of fiscal 2023. This aligns with the company's strategy of decreasing its sizable exposure to higher-risk jurisdictions.

Perenti's financial policy supports its improving credit profile.  The company's publicly stated leverage target of operating under net leverage of 1.0x (company measure) equates to about 1.5x S&P Global Ratings' adjusted gross leverage. The difference mainly reflects our focus on gross leverage, given that we typically do not net cash for companies with a weak business risk assessment.

Perenti's disciplined adherence to its stated leverage target is key to maintaining credit metrics headroom to withstand the inherent volatility in mining cycles. Under our base case forecast, we project the group's ratio of adjusted debt to EBITDA will be 1.5x and 1.4x in fiscal years 2024 and 2025, respectively. This forecast includes the addition of approximately A$110 million in EBITDA, along with an additional A$46 million in gross debt (including leases) from the DDH1 acquisition. The forecast also incorporates the underlying growth of Perenti.

Outlook

The positive outlook reflects our view that the group's commitment to its financial policy will underpin an S&P Global Ratings-adjusted leverage at about 1.5x or less in the next 12-18 months. We expect the group's increased scale from the recent DDH1 acquisition to bolster its earnings and cash flow.

Downside scenario

We could revise the outlook to stable if the group materially deviates from its financial policy objectives, including operating with a net leverage materially above 1.0x (company measure). This divergence could arise if the group were to undertake material debt-funded growth capex, acquisitions, or more aggressive shareholder return policies.

Furthermore, a revision of the outlook to stable could also occur due to the following:

• Material contracts losses or DDH1 integration challenges, resulting in earnings and cash flow materially lower than we expect; or
• Perenti increases exposure to high-risk jurisdictions such as West Africa.

Upside scenario

We could raise the rating in the next 12-18 months if the group builds a track record of operating within its financial policy of net leverage below 1.0x. An upgrade would also be contingent on the successful integration of DDH1 and growing its work-in-hand while maintaining its operating margins.

A higher rating would also reflect our expectation the company will, over time, continue to reduce its exposure to high-risk jurisdictions.

Company Description

Perenti Ltd. (ASX: PRN) is a leading mining service company, founded in 1987 and headquartered in Perth, Western Australia. The company provides production, exploration, and technological services to mining clients, predominantly in Australia and Africa. As of fiscal 2023, Perenti operated across 53 mining projects in Australia, Africa, and North America. It reported revenue of about A$2.9 billion and S&P Global Ratings' adjusted EBITDA of about A$520 million.

Following the acquisition of DDH1, the company expects a mining revenue distribution of approximately 94% for production-related services and around 6% for exploration-related services.

Our Base-Case Scenario

Assumptions

• Australia's real GDP to grow 1.1% in 2024 and 2.3% in 2025.
• Sub-Saharan Africa's real GDP to grow 3.6% in 2024 and 3.8% in 2025.
• Revenue growth of about 17% and 7% in fiscal years 2024-2025, driven by the contribution of DDH1 (acquired by Perenti in October 2023), coupled with the sustained performance of the group's existing contracts.
• Adjusted EBITDA margins to be sustained at about 18% in fiscal years 2024-2025.
• Minimal working capital movements.
• Gross capex at about 12% of revenue in fiscal 2024 followed by a moderation to 10% of revenue in fiscal 2025. We expect gross capex to moderate as much of the growth investment occurred in the preceding fiscal years 2022-2023.
• Dividend payout and share buybacks of about A$90 million in fiscal 2024.

Key metrics

Liquidity

We assess Perenti's liquidity as adequate, with sources of funds likely to cover uses by more than 1.2x over next 12 months ending June 30, 2024. Even if EBITDA decreases by 15%, net sources will likely remain positive and Perenti will remain compliant with financial covenants. Our liquidity assessment incorporates the company's ability to manage capex and asset disposals to maintain appropriate cash flows.

We anticipate the group will have the following principal liquidity sources and uses over the 12 months to June 30, 2024:

Principal liquidity sources:

• Cash balance of about A$300 million (we note about 50% of cash is held in higher-risk jurisdictions that may take several weeks to repatriate);
• Adjusted cash funds from operations of about A$475 million; and
• Undrawn revolving credit facilities of A$300 million maturing beyond 12 months.

Principal liquidity uses:

• Gross capex of about A$410 million; and
• Dividend payout and share buybacks of about A$90 million.

Environmental, Social, And Governance

Environmental factors are a moderately negative consideration in our credit rating analysis of Perenti Ltd., given its exposure to carbon emissions and waste management associated with its heavy earthmoving mining services. In fiscal 2023, Perenti outlined its objective to reach net-zero emissions by the end of fiscal 2030. In addition, the company is striving to achieve a 40% absolute reduction in scope 1 and 2 emissions by fiscal 2026, measured against the fiscal 2022 baseline. The company has further affirmed its commitment to decarbonization by announcing that its capital management policy will include the allocation of up to 10%-20% of free cash flow toward decarbonization initiatives. These initiatives include conducting trials for vehicle electrification and mine electrification studies.

Social factors are also a moderately negative consideration in our analysis. Following the DDH1 acquisition in October 2023, on a pro forma revenue basis, Perenti's exposure to higher-risk jurisdictions in West Africa stands at approximately 26%, as well as 59% to underground mining, which entails higher health and safety risks. While having no material financial impact, previous substantial health and safety events can affect its social license to operate. That said, the company is endeavoring to increase its exposure to lower-risk jurisdictions, in particular to North America, and continues to strengthen its security and emergency management of its operations and workforce.

We believe adherence to ESG commitments should benefit and bolster Perenti's long-term performance.

Issue Ratings - Recovery Analysis

Key analytical factors

• Our recovery analysis for Perenti contemplates a hypothetical simulated default during the first half of 2028. The issue rating on Perenti Finance Pty Ltd. and Perenti International Pty Ltd.'s A$420 million senior secured bank facilities is 'BBB-' with a recovery rating of '1'. This reflects our expectation of a very high recovery should a default event occur. The bank loans are guaranteed by Perenti and rank equally with all other senior secured debt of the company.

• The issue rating on Perenti Finance Pty Ltd.'s existing five-year US$433 million senior unsecured notes is 'BB'. The recovery rating has been revised to '3' from '4', reflecting increased recovery prospects driven by the DDH1 acquisition and relatively stable debt levels. These notes are also guaranteed by Perenti and rank equally with all other unsecured debt. The '3' recovery rating reflects our expectation of average recovery prospects (55%) should a default event occur.

• At the time of hypothetical default, we expect adverse macroeconomic conditions to cause global end-market demand and pricing for commodities to deteriorate materially, leading to steep declines in demand for Perenti's services and multiple contract cancellations. As a result, Perenti's revenue and earnings will materially decline, impairing its ability to meet its cash interest payments.

• We value the company as a going concern because we believe that following a payment default, the company is likely to be reorganized due to the longer-term value in its established brands and business segments.

Simulated default assumptions

• Simulated year of default: 2028
• Jurisdiction: Australia
• EBITDA at emergence: about A$165 million
• EBITDA multiple (engineering and construction services): 5.0x
• Gross enterprise value: about A$825 million
• Senior secured revolving credit facilities (85%) drawn at default.

Simplified waterfall

• Net enterprise value at emergence (after 5% administrative costs): about A$785 million
• Estimated secured priority claims (including prepetition interest): approximately A$45 million
• Estimated net enterprise value available to secured first-lien debt: about A$740 million
• Estimated secured first-lien claims (revolving facilities [85% drawn] including prepetition interest): approximately A$370 million
• Recovery rating: '1'
• Estimated net enterprise value available for senior unsecured debt: about A$370 million
• Estimated senior unsecured debt claims (including prepetition interest): approximately A$670 million
• Recovery expectations: 50%-70% (rounded estimate: 55%)
• Recovery rating: '3'
• *All debt amounts include six months of prepetition interest.

Ratings Score Snapshot

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• Perenti's Acquisition To Enhance Operations, June 27, 2023

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