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Fitch Affirms Australia's Telstra at 'A'; Outlook Stable
December 20, 2016 / 7:06 AM / 9 months ago

Fitch Affirms Australia's Telstra at 'A'; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, December 20 (Fitch) Fitch Ratings, Sydney, 20 December 2016: Fitch Ratings has affirmed Telstra Corporation Limited's (Telstra) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A'. The Outlook on the IDR is Stable. The Short-Term IDR and the commercial paper rating have been affirmed at 'F1'. KEY RATING DRIVERS Weaker Metrics, Lower Headroom Fitch expects Telstra's leverage, as measured by funds flow from operations (FFO)-adjusted net leverage, to remain elevated, but within guidelines, reflecting higher capex and shareholder returns. However, Telstra's financial profile benefits from increasing non-traditional revenue streams and growth in the mobile business, which Fitch believes will enable the company's revenue and EBITDA to grow in the low single digits. As the National Broadband Network is further rolled out, Telstra plans to offset lost wholesale margin with cost savings, other productivity improvements and growth in core and new businesses. Intensifying Competition, Network Reliability Fitch expects Telstra to face tough competition for mobile customers from SingTel Optus Pty Limited (Optus, A/Stable) and Vodafone Hutchison Australia (VHA), as they seek to regain market share lost to Telstra in the last few years. In particular, VHA's total network customers at end-June 2016 increased 4.5% from a year earlier after it improved 4G network capability. In the same period, Telstra's retail mobile subscribers grew 3.4% while Optus' mobile customers fell by around 0.5%. Telstra continues to benefit from a sizeable early-mover advantage, and substantial investments in spectrum and its 4G network, although it will need to address network reliability issues faced in the financial year ended 30 June 2016 (FY16). Higher Capex, Mobile Network Telstra's strong free cash flows relative to Optus and VHA are a competitive advantage and facilitate growth and its continued lead in mobile market share. Telstra aims to maintain its market position through increased spending on mobile infrastructure, including on improving network reliability, reflected in management's higher capex/sales guidance of 18% over FY17-FY19 (up from about 15% in FY16). Increased Shareholder Distributions Fitch expects Telstra to distribute surplus free cash flows that accumulate after setting aside funding for investment expenditure, future capital commitments and funding requirements to retain financial flexibility. Telstra's final dividend per share rose to 31 cents in FY16 from 30.5 cents in FY15. Telstra completed its AUD1.5bn share buy-back in December 2016, largely funded from the proceeds from the sale of most of its stake in Autohome. Fitch expects further dividend growth, reflecting the likely growth in Telstra's operational cash flows. Downside Risks, Capital Review Fitch sees some downside credit risks from the company's review of its long-term business and financial profile - announced on 17 November 2016. Telstra expects to complete the review in the next 6-12 months. Telstra is considering the best use of one-off and recurring payments under the NBN agreements, with a view to maximise long-term shareholder value from these cash flows. Telstra has clarified that it is committed to maintain an 'A' category credit rating. We will assess any changes in Telstra's financial risk profile following completion of this review. Market-Leading Position Telstra's rating reflects its leading market share in Australia's fixed-wire and wireless communication markets. It also reflects its superior coverage and technology leadership of its wireless network and its ownership of a material share of domestic mobile spectrum. A rollout of its 4G network, which covered about 99% of Australia's population at 30 June 2016, will continue to support its leadership in the mobile segment. Telstra also launched Australia's first voice over LTE service (VOLTE) in September 2015 and states that it had more than 1 million customers using high definition calls over 4G through VOLTE during FY16. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - mid-single digit revenue growth in FY17 and FY18; - postpaid mobile subscribers' annual growth rate of 1% over FY17 and FY18 (three-year average ending FY16 of about 4%); - prepaid mobile revenue steady at about AUD959m in FY17 and FY18; - operating EBITDA margin of 42% over FY17 and FY18 for the mobile segment (FY16: 42%); - operating EBITDA margin of 51% in FY17 and 50% in FY18 for the fixed voice segment (FY16: about 51%); - operating EBITDA margin of 40% in FY17 and FY18 for the fixed data segment (FY16: about 40%); - capex to core revenue ratio of about 18% in FY17 and FY18 (FY16: 15.6%); and - dividend of about AUD3.8bn in FY17 and about AUD3.9bn in FY18 (FY16: AUD3.8bn). RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage above 2x (FY16: 1.9x) on a sustained basis - Negative free cash flow after dividends on a sustained basis Positive: Given the company's investment needs and likely shareholder returns, a rating upgrade is unlikely in the medium term. LIQUIDITY Liquidity: Telstra's liquidity is good. At 30 June 2016, debt due within one year was AUD2.7bn compared with cash of AUD3.6bn and unused committed facilities of AUD1.7bn, although the company used liquidity of AUD1.5bn for share buybacks in October and December 2016. The largest maturity in FY17 is an EUR1bn bond falling due in March 2017. Liquidity is strengthened by ready access to capital markets and banks Contact: Primary Analyst Sajal Kishore Senior Director +61 2 8256 0321 Fitch Australia Pty Ltd. Level 15, 77 King Street, Sydney, NSW 2000 Secondary Analyst Steve Durose Managing Director +61 2 8256 0307 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016765 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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