Standard & Poor's base-case scenario
Standard & Poor's Ratings Services' base-case scenario for TM forecasts the company's debt-to-EBITDA ratio at about 2.0x, debt-to-capital ratio at less than 50%, and a ratio of funds from operations (FFO) to debt at more than 45% over the next three years. Our projections are based on the following assumptions:
-- Revenue growth will be 5.6% in 2012 and will slow down to 3.4% in 2014. This is based on our expectation that: (1) revenue growth in voice services will be flat-to-marginally-negative; (2) growth in internet and multimedia services will be 20% in 2012 and slide to 12% in 2014; and (3) growth in data services will be 6% in 2012 and decline to 4% in 2014.
-- EBITDA margins will decline to 31% in 2012 and remain at 30%-31% for the next two years, based on our expectation of higher maintenance costs.
-- We expect capital expenditure to fall to MYR2.6 billion in 2012, to MYR2.3 billion in 2013, and to MYR1.8 billion in 2014. The decline is on account of the discretionary nature of HSBB rollout going forward, with the company having achieved the rollout requirement under the public private partnership with the government.
-- We have assumed a 90% dividend payout ratio for the three years.
We assess TM's liquidity as "strong," as defined in our criteria. We expect the company's ratio of sources of liquidity to uses to be more than 1.5x during the next 12 months and 1x in the subsequent 12 months. We anticipate that TM's net liquidity sources will remain positive even if EBITDA declines by 30%. Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources include cash balance of MYR2.7 billion as of June 30, 2012, and our projection of FFO of about MYR2.9 billion annually over the next two years.
-- Uses of liquidity include debt of MYR7.7 million due in the next 12 months and MYR2 billion in the subsequent 12 months. It also includes capital repayment of MYR1.1 billion paid in August 2012.
-- Uses also include our expectation of maintenance capital expenditure of MYR1.5 billion, and our expectation of dividend distribution of MYR0.7 billion annually, even in case of stress.
The stable outlook reflects our view that the growth in TM's nonvoice services, mainly from broadband and data, will continue to offset the gradually declining revenue from its fixed-line telephony operations. The outlook also factors in our expectation that debt will not materially increase to fund either capital expenditure or any special dividend payments.
We could lower the rating on TM if higher-than-anticipated capital spending and dividend payouts weaken the company's financial metrics, such that the ratio of debt to EBITDA approaches 2.5x.
We may raise the rating if the company completes the HSBB rollout, maintains robust profitability and margins, preserves its strong liquidity, and improves its financial performance, such that it has a ratio of debt to EBITDA of less than 1.5x on a sustained basis.
The long-term local currency rating on TM will not be affected if we lower or raise the local currency sovereign rating on Malaysia by one notch. But a lowering of the long-term foreign currency sovereign rating could prompt us to lower the long-term foreign currency rating on the company.