Fitch Affirms Telekom Malaysia at 'A-'; Outlook Negative

Thu Sep 26, 2013 12:27am EDT

(The following statement was released by the rating agency) SINGAPORE/SYDNEY, September 25 (Fitch) Fitch Ratings has affirmed Telekom Malaysia Berhad's (TM) Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) at 'A-'. The Outlook is Negative. Simultaneously, the agency has affirmed TM's Foreign-Currency senior unsecured rating at 'A-'. KEY RATING DRIVERS Sovereign linkages: TM's ratings include a single-notch uplift from its standalone credit profile of 'BBB+' to reflect the Malaysian government's majority ownership (54%) through its investment arms - Khazanah Nasional Berhad, employees' provident fund board and Amanah Raya Trustees Berhad. TM, being the dominant fixed-line incumbent and broadband operator in Malaysia, continues to be strategically important to the government. Khazanah exercises significant influence on TM's strategic and operative decisions through its representation on TM's board of directors. Low ratings headroom: TM's 2013 funds flow from operations (FFO)-adjusted net leverage would be about 1.7x-1.8x (2012: 1.77x) - close to 2.0x, the point at which Fitch may downgrade the rating.. Leverage will remain around this level in 2014 and 2015 as we expect TM to generate minimal free cash flow (FCF). For 2014 and 2015, Fitch forecasts EBITDA of about MYR3.4-3.5bn (32% of its revenues), broadly equal to the sum of capex of MYR2.3bn-2.4bn (22%-24% of revenues), interest expense (MYR350m-370m) and dividends (MYR700m-800m). Sustained Profitability: TM's operating EBITDAR margin will remain above 35% during 2014 and 2015 (2012: 35%) as it gains economies of scale in its high-speed broadband (HSBB) segment, which will more than offset a data tariff decline and cost pressures. Data segment competition will intensify as eight 4G/Long Term Evolution (LTE) spectrum owners will compete on price to gain market share. Also, the entry of "resellers" - operators who lease capacity from TM on its HSBB network and market to retail and business consumers will further fuel the competition. Capex to Decline: Fitch believes that TM's capex will peak in 2013 at 23% of revenue, or MYR2.3-2.4bn, as it has largely completed its HSBB-related investments to reach 1.45 million premises at end-June 2013. Capex will decline from 2014 to around 20%-21% of revenue (2012: 23% of revenue). Broadband revenue to rise: Fitch expects TM's HSBB customers to increase by an average of 12,000-15,000 a month during 2014. About 40% will be new customers; the rest will migrate from TM's traditional broadband service. Adding fibre-based consumers will benefit profitability as the customers' monthly average revenue per user (ARPU) of MYR170-180 is much higher than for its traditional voice (MYR30-35) and copper-based internet business (MYR78-82). RATING SENSITIVITIES TM's Negative Outlook reflects a similar Outlook on sovereign's FC IDR. Should the sovereign's FC IDR be downgraded to 'BBB+' from 'A-', the government's credit strength would be the same as TM's standalone profile and Fitch will not provide any uplift to TM's ratings for government support. Positive: Future developments that may collectively, leads to the Outlook being revised to Stable include: - 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 exceeds 2.0x - Operating EBITDAR margins fall 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 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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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