March 3, 2017 / 9:16 AM / 5 months ago

Fitch Affirms Telekom Malaysia at 'A-'; Outlook Stable

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(The following statement was released by the rating agency) SINGAPORE, March 03 (Fitch) Fitch Ratings has affirmed Telekom Malaysia Berhad's (TM) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. The agency has simultaneously affirmed TM's foreign-currency senior unsecured rating at 'A-'. KEY RATING DRIVERS Low Rating Headroom: Fitch expects TM's FFO-adjusted net leverage to increase to around 2.4x in 2017-2018 (2016: 2.3x), as the company continues to build out its long-term evolution (LTE) and fixed-line network. The Stable Outlook reflects our view that TM will deleverage to below 2.25x by 2019. We are likely to consider taking negative rating action should that be delayed, which may arise from higher-than-expected investments and/or a significant shrinking in EBITDA margins. Broadband Pricing Uncertainties: The government announced in the Budget 2017 that fixed broadband service providers should offer higher speeds at the existing price effective January 2017, and speed will be doubled with a 50% reduction in prices within the next two years by 2019. There is still a lack of clarity if the latter would entail a reduction in revenues for fixed broadband service providers. Providing higher speeds at the same tariffs are broadly revenue neutral, and we expect this to involve incremental investment for TM. However, an overall cut in tariffs would have a significant impact on TM's margins and may lead to negative rating action - given the thin headroom of its ratings. TM's management continues to be in discussions with the government to seek greater clarity on the proposed broadband price reduction. High Capex: Gross cash capex is likely to peak at around MYR3.8bn in 2017, before declining to MYR2.8bn-3.2bn in 2018-2019 (2016: MYR3.7bn). Our projections assume the MYR3.4bn 10-year high-speed broadband (HSBB2) and sub-urban broadband (SUBB) will be accelerated over a five-year period ending 2019. A timely collection of a MYR1.1bn government grant for the HSBB2 and SUBB projects should ease some of the capex burden. Negative FCF: Fitch expects cash flow from operations of MYR3.4bn will not be sufficient to cover high capex and dividend commitments for 2017 and 2018. Operating EBITDAR in 2017 is likely to be around MYR4.3bn (2016: MYR4.2bn), given the incremental cost needed to support TM's broadband improvement programme (BIP) and the ongoing EBITDA losses for the mobile business. TM's BIP entails a year-long rollout of higher broadband speed for the same price, targeting TM's 500,000 residential households. Convergence Strategy to Drive Growth: We believe TM's strong convergence capabilities through fixed voice, fixed broadband, IPTV and mobile should provide a significant competitive advantage to drive revenue growth. Management views the mobile business as complementary to its convergence strategy, rather than a standalone product that competes with the major mobile operators. As such, we expect TM's strategic focus to remain on its fixed-line business, with contributions from mobile to be fairly small. Single-Notch Uplift for Sovereign Links: TM's rating of 'A-' includes a one-notch uplift from its standalone credit profile of 'BBB+', to reflect the Malaysian sovereign's (A-/Stable) effective 55% majority state ownership and strategic influence through board representation and policy implementation. Furthermore, TM spearheads the nation's broadband network projects; most recently the HSBB2 and SUBB developments. DERIVATION SUMMARY TM is well positioned relative to its closest peer, Philippine integrated telco PLDT, Inc. (BBB/Stable), considering its market dominance and the benign competition in Malaysia's fixed broadband market. TM also enjoys better growth prospects on the back of rising fibre adoption. However, these strengths are offset by its thinner operating EBITDA margins, which are likely to narrow further due to cost pressures from its mobile business and the risk of cuts in broadband tariffs. Parent/subsidiary linkage applies, underpinned by the state's influence on operating and financial policies, and the strategic importance of TM's network assets to the government. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for TM include: - Revenue to grow by 3%-4% in 2017-2019, driven by the expansion of TM's fixed broadband services through HSBB2 and SUBB and bundling opportunities. - Operating EBITDAR of around MYR4.3bn-4.5bn in 2017-2018. - Budget 2017's proposed price reduction to be on a per Mbps basis and to have only a relatively limited impact on average revenue per user (ARPU) in 2017-2019. - Gross cash capex of MYR2.8bn-3.7bn in 2017-2019 excludes any potential mobile spectrum fees. - Timely disbursement of the MYR1.1bn government grant for HSBB2 and SUBB according to the rate of completion for these projects. Our forecast excludes the MYR1bn grant by telecoms regulator, Malaysian Communications and Multimedia Commission (announced in the Budget 2017) due to the lack of clarity on the potential recipients of the grant and the timeline of disbursement. - Effective tax rate to decline to around 25% in 2017-2019, underlining the last-mile broadband tax incentives. - Minimum dividend payments of MYR700m, in line with TM's stated payout policy. RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action: - Inability to reduce FFO-adjusted net leverage below 2.25x by 2019, which may arise due to higher-than-expected investments and/or a substantial cut in broadband tariffs - Operating EBITDAR margin falls below 30% on a sustained basis (2016: 30.3%) - Negative rating action on the sovereign's Foreign-Currency IDR - Weakening of linkages with the sovereign. Positive: Any rating upgrade would be contingent on a prior upgrade of the sovereign foreign-currency rating. Should this happen, developments that may lead to positive rating action include: - Evidence of closer ties between TM and the sovereign, for example sovereign guarantee of debt - Significant, sustained improvement in TM's standalone financial profile, for example FFO-adjusted net leverage falling below 1.0x, operating EBITDAR margin above 35%, and positive post-dividend FCF. However, we consider neither of these to be likely in the medium term. LIQUIDITY Solid Liquidity: TM's cash balance of MYR2.9bn at end-2016 was sufficient to cover its debt obligations of MYR1.6bn falling due over the next 24 months. Its liquidity is strengthened by proven access to capital markets - in light of the company's market and financial position. The total on-balance sheet debt of MYR8bn comprised 98% unsecured debt and 34% in foreign-denominated debt, of which 49% had been hedged. FULL LIST OF RATING ACTIONS Telekom Malaysia Berhad --Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable --Foreign-currency senior unsecured rating at 'A-; Contact: Primary Analyst Janice Chong Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Nitin Soni Director +65 6796 7235 Committee Chairperson Buddhika Piyasena Senior Director +65 6796 7223 Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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