(The following statement was released by the rating agency)
Jan 10 -
Summary analysis -- PT Profesional Telekomunikasi Indonesia ------- 10-Jan-2013
CREDIT RATING: BB/Stable/-- Country: Indonesia
Credit Rating History:
Local currency Foreign currency
30-May-2012 BB/-- BB/--
The rating on PT Profesional Telekomunikasi Indonesia (Protelindo) reflects the company’s high leverage and moderately concentrated customer base, and the weak market position of its key customer, PT Hutchison CP Telecommunications (HCPT; not rated). Protelindo’s strong operating efficiency, stable cash flow and strong margins from long-term tower leases, and good market position temper these weaknesses. We assess the company’s financial risk profile as “aggressive” and its business risk profile as “fair.”
We expect Protelindo’s leverage to remain high for the next 12-24 months due to potential large debt-funded tower acquisitions. In the last quarter of 2012, the company spent Indonesian rupiah (IDR) 1.3 trillion to acquire towers in Indonesia and the Netherlands. We anticipate that Protelindo will continue to invest in built-to-suit towers for companies such as, PT XL Axiata Tbk. (not rated) and PT Telekomunikasi Selular (BBB-/Stable/--; axA-/--). Protelindo is exposed to exchange rate fluctuations because about 60% of its debt and about 40% of its revenue are denominated in foreign currency.
Protelindo’s business risk profile reflects the company’s customer concentration. About 35% of Protelindo’s revenue comes from HCPT, which has a weak market position with a subscriber market share of less than 5%. We, however, believe that the following factors mitigate the concentration risk: (1) the essential nature of the telecom infrastructure to the industry; (2) the support of HCPT’s parent Hutchison Whampoa Ltd. (A-/Stable/--; cnAA/--) through consistent investments in the company; and (3) a non-cancelable feature of lease contracts, even if ownership of the telecom operator changes. We expect Protelindo’s customer concentration to gradually reduce over the next two to three years.
Protelindo’s long-term tower leases of about 10 years support its strong operating efficiency. The leases contain inflation-linked clauses. The company also passes through certain costs to customers, including electricity costs. Protelindo’s more than 7,500 towers have a tenancy ratio (the number of operators sharing a tower) of about 1.73x. The good tenancy ratio, combined with Protelindo’s experienced management, contributes to the company’s above-average EBITDA margins of 76%-78%.
Protelindo has a good market position in the Indonesian tower industry. It is the country’s largest independent tower company. Its tower portfolio is diversified across the country. PT Tower Bersama Infrastructure Tbk. (not rated) is a close second. Large telecom operators, such as XL Axiata, still control about two-thirds of telecom towers in Indonesia and share some of them with other operators. Nevertheless, we believe that the demand for towers from independent tower companies will increase as local regulations encourage tower sharing and telecom operators focus on providing services rather than on managing towers.
We estimate that Protelindo’s debt-to-EBITDA ratio will remain about 4x and the ratio of funds from operations (FFO) to debt will stay 15%-20% over the next two years due to potential sizable acquisitions. However, in the absence of any acquisitions, we forecast the company’s debt-to-EBITDA ratio at 3.5x in 2013. Our projections are based on the following assumptions:
-- Revenue growth of about 30% in 2013 driven by recent acquisitions and ongoing organic growth.
-- Stable EBITDA margins of about 78%.
-- Non-acquisition related capital expenditure of IDR1.5 trillion-IDR2 trillion.
-- Marginal maiden dividend distribution.
We assess Protelindo’s liquidity to be “adequate,” as defined in our criteria. We expect the company’s sources of liquidity will exceed its uses by more than 1.2x over the next 12 months. Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources include cash balance of IDR1.25 trillion and an unused long-term committed credit facility of IDR700 billion as of Sept. 30, 2012.
-- Sources of liquidity include our expectation of FFO of about IDR1.5 trillion each year over the next two years.
-- Sources also include additional debt of about US$47 million to fund the acquisition in the Netherlands.
-- Uses of liquidity include debt of about IDR725 billion due in the next 12 months. We expect the debt to fall to about IDR100 billion after the company completes its capital structure restructuring exercise that is currently underway.
-- Uses also include our expectation of a minimum capital expenditure of IDR1 trillion for build-to-suit towers and IDR1.3 trillion (for the quarter ended Dec. 31, 2012) for acquisitions.
-- Net liquidity sources will remain positive even if EBITDA declines by 15%.
Protelindo has significant headroom under its covenants.
The stable outlook reflects our expectation that Protelindo can maintain its operating efficiency and cash flows.
We could lower the rating if the company undertakes large debt-financed tower acquisitions, such that we expect the debt-to-EBITDA ratio to remain more than 4.5x for a prolonged period. We could also downgrade Protelindo if the company’s market position deteriorates because HCPT winds up its operations or sells them to a weak telecom operator.
We could raise the rating if Protelindo’s market position and diversity improve. We could also upgrade the company if we expect it to strengthen and then maintain its financial performance, including a debt-to-EBITDA ratio of 3.5x or lower.