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Fitch Revises Telekom Malaysia's Outlook to Negative; Affirms 'A-'
(The following statement was released by the rating agency) SINGAPORE/SYDNEY, July 31 (Fitch) Fitch Ratings has revised the Outlook on Telekom Malaysia Berhad's (TM) Long-Term Foreign-Currency Issuer Default Rating (FC IDR) to Negative from Stable. Simultaneously, the agency has affirmed the FC IDR and senior unsecured rating at 'A-'. The rating action follows Fitch's revision of Malaysia's Outlook to Negative from Stable (see 'Fitch Revises Malaysia's Outlook to Negative; Affirms IDRs at 'A-'/'A'', dated 30 July 2013 on www.fitchratings.com). Sovereign linkages: TM's Negative Outlook reflects that of Malaysia's FC IDR. TM's rating includes a single-notch uplift from its standalone credit rating of 'BBB+' to reflect state support. This view of support is based on the Malaysian government's effective majority ownership through its investment arm, Khazanah Nasional Berhad, the employees' provident fund board, and Amanah Raya Trustees Berhad. Should the sovereign's FC IDR be downgraded to 'BBB+', the government's credit strength would be the same as TM's standalone profile and Fitch would therefore not provide any uplift for government support to TM's ratings. TM still important to government: TM, being a dominant fixed-line incumbent and broadband operator in Malaysia, continues to be strategically important to the government. Fitch believes that Khazanah exercises significant influence on TM's strategic and operative decisions through its representation on TM's Board of Directors. Reduced ratings headroom: TM has lower headroom in its standalone ratings after a one-off capital repayment of MYR1.1bn in August 2012, which weakened its funds flow from operations (FFO)-adjusted net leverage to 1.9x at end-March 2013, close to the agency's negative guidance of 2.0x. The capital repayment was over and above TM's regular dividend policy of a minimum of MYR700m or 90% of net income. Sustainable EBITDAR margin: Fitch expects TM's operating EBITDAR margin to remain stable at 36%-37% over 2013-2014 due to increasing economies of scale in high-speed broadband (HSBB), which is likely to offset a decline in data tariff due to rising competition. TM's HSBB take-up was at more than 40% of premises by end-March 2013, in line with the agency's expectations. 2013 FCF turning positive: Fitch believes that TM's post-distribution free cash flow (FCF) will turn positive for 2013, as capex peaked in 2012. This is based on the assumption that most HSBB-related capex has been completed after HSBB coverage reached 1.4 million premises at end-March 2013. Broadband revenue to rise: Fitch sees continued strong revenue growth for TM's HSBB in both the retail and wholesale segments. Wholesale service revenue will rise as wireless operators will require wholesale access and backhaul services to meet rising demand for wireless broadband. Rating Sensitivities Positive: Future developments that may collectively, lead to positive rating action, such as the Outlook being revised to Stable, includes: -Revision of Malaysia's FC IDR Outlook to Stable from Negative Negative: Future developments that may, individually or collectively, lead to negative rating action include: -A downgrade of Malaysia's FC IDR to BBB+ -FFO-adjusted net leverage exceeding 2.0x -Operating EBITDAR margins falling below 30% on a sustained basis Contacts: Primary Analyst Nitin Soni Associate Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Secondary Analyst Shahim Zubair Associate Director +65 6796 7227 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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