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Fitch Affirms Australia's Telstra at 'A'; Outlook Stable
December 20, 2016 / 7:06 AM / a year 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: Additional information is available at 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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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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