June 19, 2017 / 11:13 AM / 4 months ago

Fitch Downgrades Tiphone to 'BBB+(idn)'; Outlook Negative

(The following statement was released by the rating agency) JAKARTA, June 19 (Fitch) Fitch Ratings Indonesia has downgraded Indonesian-based telecommunication trading company PT Tiphone Mobile Indonesia Tbk's National Long-Term Rating to 'BBB+(idn)' from 'A-(idn)'. The Outlook is Negative. At the same time, we have downgraded the ratings on Tiphone's IDR2 trillion bond programme and IDR500 billion bonds issued under the programme to 'BBB+(idn)' from 'A-(idn)'. The downgrade and Negative Outlook reflect Tiphone's sustained negative cash flow from operations (CFO) and increasing leverage, which are likely to persist in the medium term. The negative CFO stems from the high working capital intensity of its voucher and handset businesses, which offsets the stable cash flow from the distribution of prepaid vouchers for PT Telekomunikasi Selular (Telkomsel, AAA(idn)/Stable). 'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Sustained Negative CFO: Tiphone's voucher and handset businesses require high working capital for inventory purchases. This led to negative CFO in 2012-2016. We expect the trend to continue in the next few years due to expected volume growth; and this may impair the company's debt repayment capacity and its refinancing ability. Working Capital Keeps Leverage High: Tiphone has been borrowing to finance its high working capital and this resulted in total adjusted debt/operating EBITDAR reaching a peak of 4.8x in 2016. We expect leverage to continue increasing in 2017-2020 due to additional planned debt issuance, despite higher EBITDA. Stable Cash Flow from Telkomsel: Tiphone's rating benefits from its 10-year relationship with Telkomsel, for which Tiphone is the largest distributor of prepaid vouchers and starter packs. Tiphone accounted for around 29% of Telkomsel voucher sales in 2016 (2015: 22%). Telkomsel, which is 65% owned by PT Telekomunikasi Indonesia Tbk (Telkom, BBB-/Positive), is the leading mobile operator in Indonesia in terms of subscribers. Telkomsel's subscriber base increased 13.8% yoy in 2016, which supports cash flow stability for Tiphone. Lower Handset Contribution: We expect the voucher business to account for between 80% and 85% of Tiphone's EBITDA during 2017-2019 (2016: 80%) as the company continues to shift its focus away from the more competitive handset business. Handset sales are more competitive because of the large number of small retailers, expanding online sales platforms, rental expenses to establish stores and changing consumer tastes. We also believe that the voucher business carries less inventory risk than the handset business. Vouchers are easier to liquidate and are not prone to obsolescence, and demand has been rising as customers use more data services. DERIVATION SUMMARY Tiphone has no directly comparable industry peers rated on the Indonesian national scale, but the company's credit profile is weaker than that of telecoms transaction business PT Finnet Indonesia (Finnet, rated A-(idn) on a standalone basis). Despite being smaller and having weaker margins, Finnet has stronger CFO, FCF and credit metrics. In addition, Fitch has compared Tiphone to companies in other sectors, such as PT Berlina Tbk (A-(idn)/Stable) and PT Aneka Gas Industri Tbk (A-(idn)/Stable). Berlina has higher margin, lower leverage and better coverage than Tiphone, while Aneka Gas has declining leverage and improving coverage with better profitability. Fitch assesses Tiphone's credit profile to be weaker than that of Berlina and Aneka Gas. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Voucher sales volume growth of 9%-15% in 2017-2020. - No change in the voucher business' average selling price. - Cellular phone sales growth of 4%-9% in 2017-2018, and around 15% in 2019-2020. - Capital expenditure at IDR31 billion in 2017, IDR22 billion in 2018, and IDR4 billion in 2019-2020. - Cash conversion cycle at 75 days in 2017-2020. - Indirect cash cost at 2.5% of revenue in 2017-2018, and 3% of revenue in 2019-2020. - Dividend payout of 25% of net income in 2017-2020. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Negative Rating Action -Total adjusted debt/operating EBITDAR above 5x on a sustained basis. -Failure to roll over short-term lending facilities that leads to deterioration in the company's liquidity position. Developments That May, Individually or Collectively, Lead to Positive Rating Action -Total adjusted debt/operating EBITDAR below 5x on a sustained basis would revert the Outlook to Stable. - Evidence of financial support from Telkom may revert the Outlook to Stable or lead to a rating upgrade. LIQUIDITY Available Working Capital Facilities: Tiphone had around IDR1 trillion of cash compared to IDR841 billion of short-term debt maturities at end-2016. The company still has around IDR100 billion of unutilised short-term facilities (uncommitted) at end-2016. We expect the company to refinance most of its loans in 2018, when debt maturity reaches its peak at more than IDR3 trillion. FULL LIST OF RATING ACTIONS PT Tiphone Mobile Indonesia --National Long-Term Rating downgraded to 'BBB+(idn)' from 'A-(idn)'; Outlook Negative --IDR2 trillion bond programme downgraded to 'BBB+(idn)' from 'A-(idn) --IDR500 billion bond issuance under IDR2 trillion bond programme downgraded to 'BBB+(idn)' from 'A-(idn)' Contact: Primary Analyst Olly Prayudi Associate Director +62 21 2988 6812 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. 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