TEXT-S&P summary: Sri Lanka Telecom PLC
(The following statement was released by the rating agency)
Aug 24 -
Summary analysis -- Sri Lanka Telecom PLC ------------------------- 24-Aug-2012
CREDIT RATING: B+/Stable/-- Country: Sri Lanka
Primary SIC: Communications
Credit Rating History:
Local currency Foreign currency
29-Feb-2012 B+/-- B+/--
15-Sep-2010 BB-/-- B+/--
15-Dec-2008 B+/-- B+/--
16-Nov-2007 BB-/-- BB-/--
The rating on Sri Lanka Telecom PLC (SLT) reflects the country and macroeconomic risks of Sri Lanka (B+/Stable/B) and the company's large capital expenditure plans. SLT's strong cash flow protection measures and market position temper these weaknesses. We assess SLT's stand-alone credit profile as 'bb+'. The company's business risk profile is "fair" and its financial risk profile is "intermediate", as defined in our criteria.
While the country and macroeconomic risks of Sri Lanka have reduced over the past two years, they still remain high, in our opinion. We expect the government's stepped up investments to result in a real GDP growth of 7.3%-7.5% each year over the next one to two years. We also anticipate that inflation will be moderate, at less than 10% for the next two years. Nevertheless, fundamental fiscal weakness remains, with high public debt and interest burden.
We expect the growth in the Sri Lankan telecom industry to moderate as wireless penetration has crossed 80%. The subscriber growth in the cellular segment was 9% in the 15 months to March 31, 2012, much faster than the 1% growth in the fixed services segment. Increasing broadband penetration primarily led the growth in fixed services. The cellular segment is still highly competitive. Price-based competition has reduced after the regulator modified the interconnection regime and introduced a floor price for telecom services in 2010. Nevertheless, we believe regulatory intervention is a risk for telecom companies in Sri Lanka.
We expect SLT to sustain its improved margins in the next one to two years. SLT's EBITDA margin improved to 34.1% for the year ended Dec. 31, 2011, from 33.9% for 2010. We attribute the company's better operating margins in 2011 to an improvement in macroeconomic conditions, regulatory measures to reduce competition, and the company's steps to better operating efficiency. The operating performance in the first half of 2012 is also slightly better than our conservative estimates.
In our view, SLT's financial policy is moderate. The company's strong cash flow protection measures offset its large capital expenditure plans. SLT plans to invest Sri Lankan rupee (LKR) 25 billion in 2012 for expansion at SLT and its wholly owned subsidiary Mobitel (Pvt.) Ltd. and to add infrastructure to their networks. Of this, about LKR17.5 billion will be invested in SLT. We expect SLT's capital expenditure to gradually come down in 2013 and 2014. The company's still large expenditure would result in negative free operating cash flow (FOCF) of about LKR10 billion in 2012 and weaken the financial ratios. However, we expect the ratios to remain strong for the rating. We estimate the company's ratio of funds from operations (FFO) to adjusted debt to stay above 60% and its adjusted debt-to-EBITDA ratio to remain below 1.5x for the next two years.
SLT has a strong market position, in our view. It has about 0.94 million fixed-line customers and more than 3.8 million cellular subscribers as of Dec. 31, 2011. The company accounts for more than 40% of subscribers in the fixed-line segment in Sri Lanka, 21% in the mobile segment, and about 50% in the broadband segment. Its business is also well diversified. The mobile segment contributed 43% of the company's operating profit for the year ended Dec. 31, 2011, and the fixed segment contributed 18%.
The Sri Lankan government, along with its associated institutions, owns a little more than 50% of SLT. Malaysia's Global Telecommunications Holdings B.V. (GTH), a wholly owned subsidiary of Malaysia's Usaha Tegas Sdn. Bhd., holds a 45% stake. Retail and institutional investors hold the remaining 5%.
Based on our criteria for rating government-related entities, we see a "low" likelihood of extraordinary government support for SLT based on our assessment of the following SLT characteristics:
-- Limited importance to the government. The rapidly growing wireless market, which accounts for more than 90% of subscribers, has been liberalized. The private sector has a significant presence and the operating conditions are highly competitive.
-- Limited link with the Sri Lankan government. We believe SLT's business and financial policy decisions are made in collaboration with the Sri Lankan government and GTH. This decision-making process limits the potential for adverse intervention by the Sri Lankan government. In addition, we believe that SLT's operations have run fairly independently of the government since the company's partial privatization in 1997.
We assess SLT's liquidity to be "adequate", as defined in our criteria. We expect the company's sources of liquidity to be more than 1.2x its uses in 2012. Our liquidity assessment is based on the following factors and assumptions:
-- As of Dec. 31, 2011, SLT's liquidity sources include cash and short-term investments of LKR11.58 billion and unused credit facilities of about LKR3.5 billion. Sources also include our projections of FFO of about LKR15 billion in the next 12 months.
-- Uses of liquidity include projected maintenance capital expenditure of about LKR8 billion (compared with total projected capital expenditure of about LKR25 billion), debt maturities of about LKR5.3 billion, and projected dividends of about LKR2 billion over the next 12 months.
-- The company also has unused working capital facilities of more than LKR6 billion, which we have not factored into our sources of liquidity.
-- We anticipate that SLT's net liquidity sources will remain positive even if its EBITDA declines by 20%.
-- The company does not have any financial covenants.
Our liquidity assessment also factors in SLT's good banking relationships and financial flexibility due to the company's strong market position and financial ratios.
The stable outlook on the rating on SLT reflects the outlook on the sovereign rating.
We could raise or lower the local currency rating on SLT if we take a similar action on the sovereign rating. A rating action on the foreign currency rating on the company will depend on any change in our transfer and convertibility assessment of Sri Lanka. We are unlikely to lower the ratings even if SLT's operating and financial performances deteriorate significantly because the company's SACP is three notches above the rating.
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