(The following statement was released by the rating agency)
July 02 -
Summary analysis -- Emirates Telecommunications Corp. (Etisalat) -- 02-Jul-2012
CREDIT RATING: AA-/Stable/A-1+ Country: United Arab
Primary SIC: Telephone
Credit Rating History:
Local currency Foreign currency
28-May-2010 AA-/A-1+ AA-/A-1+
22-Jul-2008 A+/A-1 A+/A-1
The 'AA-' ratings on Emirates Telecommunications Corp. (Etisalat), the former incumbent fixed-line and leading mobile telecommunications operator in the United Arab Emirates (UAE), are based on the company's stand-alone credit profile (SACP), which Standard & Poor's Ratings Services assesses at 'aa-', as well as on Standard & Poor's opinion that there is a "high likelihood" that the government of the UAE (not rated) would provide timely and sufficient extraordinary support to Etisalat in the event of financial distress. However, this does not provide any uplift to the overall rating.
The SACP is supported by the company's leading market position in the UAE telecoms market, high profitability, and good cash conversion. Furthermore, the company maintains good financial flexibility, as a result its low debt and sizeable cash balances.
The ratings are constrained by Etisalat's payment of a high percentage of its profits as dividends and royalties, which can moderate the company's financial flexibility. In addition, some uncertainty remains over the credit impact of potential future mergers and acquisitions in emerging markets as part of Etisalat's strategic goal of maintaining high growth rates. The ratings are also constrained by the company's board-approved maximum leverage policy of 2.5x debt to EBITDA, the achievement of which would not be commensurate with the rating, in our view.
In accordance with our criteria for government-related entities (GREs), our view of a "high" likelihood of extraordinary government support is based on our assessment of Etisalat's:
-- "Important" role for the government of the UAE as a provider of key communications infrastructure and as a flagship national company; and
-- "Very strong" link with the government, considering the latter's 60% shareholding in the company (which is supported by decree), its appointment of board members, and its active role in the oversight of decision making, which is particularly relevant for decisions related to potential investment outside the UAE.
S&P base case business and profitability scenario
In our base-case assessment we assume that Etisalat will achieve low-single-digit percentage consolidated revenue growth in 2012. This includes the assumption that domestic revenues will continue declining due to competition, while solid growth in the international operations will compensate. Accordingly, we expect that the revenue contribution of the international operations could increase from the current 27%, which could heighten the company's business risk due to lower quality of earnings from markets outside the Gulf Cooperation Council region.
In line with our expectations, Etisalat's profitability remains under pressure, with the reported EBITDA margin for 2011 declining to 49% from 52% in 2010. In our base-case assessment, we assume that this trend will continue, although at a slower pace. It is our view that in 2012 improvement in the profitability of the international operations could almost compensate for increasing costs in the UAE, which should support the consolidated margin over the near term.
S&P base-case cash flow and capital-structure scenario
In our base-case assessment we assume that Etisalat will retain its net cash position, as the company remains self-sufficient in financing its growth, absent any significant acquisitions. The existing cash cushion of close to UAE dirham (AED) 10 billion at the end of 2011 enhances its flexibility and provides headroom for external growth opportunities.
We assume that Etisalat will continue to generate strong underlying cash flows, relying primarily on its domestic operations. This should ensure strong cash flow protection ratios, with expected FFO/debt above the rating target of 60%. We assume that Etisalat's capital expenditure will not exceed AED6 billion, as most of the rollout of its fixed broadband network in the UAE has been completed and because its Indian subsidiary has been deconsolidated. This should provide for positive free operating cash flow (FOCF) in 2012. However, discretionary cash flow is likely to remain negative, as we expect Etisalat will continue to pay significant dividends.
The short-term rating is 'A-1+'. This is supported by our view of Etisalat's liquidity as "strong", due to its reported net cash position, free cash flow generation, and good financial flexibility for its needs. On Dec. 31, 2011, Etisalat's cash and cash equivalents of close to AED10 billion comfortably covered its short-term debt maturities of AED2.5 billion, leading to a very strong ratio of sources to uses of liquidity of more than 2x.
We believe that Etisalat's FOCF generation will remain an important source of financing for the company. However, FOCF might not be sufficient if Etisalat were to undertake large acquisitions or other corporate activities while continuing to pay substantial dividends and royalties. That said, due to the existing cushion, Etisalat's strong liquidity is unlikely to be impacted.
The stable outlook reflects our view that Etisalat will likely remain committed to a conservative financial policy and that FOCF generation in its domestic business will remain robust in the face of any market changes.
We believe that adjusted FFO to debt (including cash netting) is likely to remain higher than 60%. A lasting reduction to less than 60% would put pressure on the ratings. Etisalat's main credit protection ratios remain strong, in our view, given the low level of debt on the balance sheet and substantial cash reserves. The ratios therefore offer some flexibility for Etisalat's investment plans, in our view.
We would consider lowering the ratings if the company were to accelerate its growth plan or significantly transform itself through acquisitions, leading to lower-quality earnings. The ratings could come under further pressure if Etisalat were to incur more debt and leverage were to increase or if regulatory decisions were to substantially hamper the company's financial performance.
We do not envisage ratings upside at this stage, given the company's foreign expansion strategy and the associated risks to leverage, and its ongoing payment of substantial dividends.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009