TEXT-Fitch upgrades Indonesia's PT XL Axiata to 'BBB'; outlook stable
(The following statement was released by the rating agency)
Jan 25 - Fitch Ratings has upgraded Indonesia-based P.T. XL Axiata Tbk's (XL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'BBB' from 'BB+'. Simultaneously, Fitch has upgraded XL's National Long-Term rating to 'AAA(idn)' from 'AA+(idn)'. The Outlook is Stable.
The upgrade reflects Fitch's view that XL's ratings should be more closely aligned to the credit profile of its 66.7% parent, Axiata Group Berhad (Axiata), due to strengthening links between the two companies. At end-September 2012, XL was Axiata's largest subsidiary; as it contributed about 40% and 46% of Axiata's consolidated revenue and EBITDA, respectively, up from 34% and 36% in 2009. XL is also Axiata's fastest growing subsidiary with double-digit revenue growth.
Fitch believes that Axiata has a strong ability to support XL with cash injection should this be required, given its conservative credit profile and established cash-generative Malaysian operations.
Fitch also believes that XL's standalone credit profile will improve in 2013 as capex peaked in 2012 at IDR8.5trn, mainly to expand 3G infrastructure. This should allow XL to return to positive free cash flow (FCF) this year after recording negative FCF in 2012. The company's strong credit profile is also underpinned by its above-industry revenue growth and solid operating EBITDAR margin of 47% which can sustain an annual capex plan of IDR7trn-IDR8trn and a dividend payout ratio of 30% of net income. Fitch believes that XL's decision to invest more in 2012 than the country's second-largest telco, PT Indosat Tbk (Indosat, 'BBB'/Stable), could benefit its profitability and reduce customer churn. XL is Indonesia's third largest telco, with a narrowly smaller market share than that of Indosat.
Fitch believes that Indonesia's top-three telcos will dominate the fast-growing data market given their strong hold in the voice market and their ability to invest in 3G infrastructure. The weaker telcos will struggle to gain any meaningful market share as they continue to make overall EBITDA losses and do not have the balance sheet strength to support infrastructure investments needed for data expansion. Also, code division multiple access telcos are struggling to grow profitably as they continue to lose subscribers and are therefore investing less than GSM telcos.
What could trigger a rating action?
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- an upgrade in Fitch's credit view of Axiata will benefit XL's International ratings. However, an upgrade of the Foreign-Currency IDR would be contingent on the Country Ceiling being upgraded. XL's Foreign Currency IDR is currently at the same level as the Country Ceiling.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-a downgrade of Indonesia's Country Ceiling, which would lead to a downgrade in XL's Foreign-Currency IDR
- weakening of linkages with Axiata
- a downgrade of Fitch's credit view of Axiata
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