Fitch Affirms Indonesia's PT XL Axiata at 'BBB'/'AAA(idn)'; Outlook Stable

Thu Jan 23, 2014 10:53pm EST

(The following statement was released by the rating agency) JAKARTA/SINGAPORE, January 23 (Fitch) Fitch Ratings has affirmed Indonesia-based mobile telecommunications operator P.T. XL Axiata Tbk’s (XL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB'. Simultaneously, Fitch has affirmed XL’s National Long-Term Rating at ‘AAA(idn)’. The Outlook is Stable. ‘AAA’ National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country. KEY RATING DRIVERS Support from Parent: XL’s ‘BBB’ rating is closely aligned with its 66.5% parent Axiata Group Berhad’s (Axiata) credit strength. Fitch rates XL on a top-down basis according to its parent and subsidiary rating criteria dated 5 August 2013, given its strategic and financial importance to its parent. XL is Axiata’s fastest-growing subsidiary and it accounted for 36% and 37% of Axiata’s revenue and EBITDA, respectively, during the nine months ending September 2013. Fitch believes that Axiata has sufficient credit strength to support XL with a cash injection should this be required, given its conservative credit profile and established cash-generative Malaysian operations. The linkages were further strengthened in November 2013 when Axiata committed to extend a USD500m shareholder loan to XL to partly fund a proposed acquisition of a 95% stake in PT Axis Telecom (Axis), Indonesia’s fifth-largest mobile phone operator by revenue market share. XL is financing the USD865m acquisition via debt. The acquisition is subject to regulatory and shareholders’ approval and it is expected to be completed by end-March 2014. Weakening Standalone Credit Profile: XL’s 2014 funds flow from operations (FFO)-adjusted net leverage will deteriorate to 2.7x-2.8x (estimated 2013: 2.1x and 2012: 1.6x), while operating EBITDAR margin will decline to around 40% (estimated 2013: 43% and 2012: 49%) as it consolidates the unprofitable Axis’s operations, which generate about USD260m in annual revenues. However, we expect XL to deleverage during 2015-17 based on its ability to generate free cash flows (FCF) of around 4%-5% of its revenues, after capex peaked in 2013 and as it realises capex and opex savings from the Axis acquisition. Improved Market Position: After the acquisition, XL’s revenue market share will increase to 22%, ahead of second-largest operator, PT Indosat Tbk (BBB/Stable) with 18%. The acquisition will provide XL with 15MHz in the 1800MHz spectrum, 14 million additional subscribers and 1,600 telecom towers. XL’s standalone credit profile factors in a track record of above-industry average revenue growth and an ability to generate FCF. Its focus on data-fuelled revenue growth and its early investment in data-related infrastructure should enable it to gain market share in the medium term. Capex Peaked in 2013: Fitch believes that XL’s capex peaked in 2013 and will decline starting 2014 as it realises capex savings from the Axis acquisition and slows data-related investments given current low utilisations on its network. XL will return to positive FCF in 2014 after reporting negative FCF during 2012-13. We estimated 2013 capex to be at the lower end of XL’s guidance of IDR8trn-IDR9trn. Industry Consolidation: Fitch also expects XL’s 2015 operating EBITDAR margin to improve as the industry consolidates or smaller telcos raise tariffs given their unsustainable business models. Code Division Multiple Access (CDMA) operators, including PT Bakrie Telecom (C) and PT Smartfren (CC(idn)), continue to struggle to gain market share and face liquidity problems. Fitch also expects Indosat and market leader PT Telekomunikasi Indonesian Tbk (BBB-/Stable) to shut their CDMA segments and reallocate the spectrum for GSM use. RATING SENSITIVITIES 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 Contact: Primary Analysts Nitin Soni (International ratings) Associate Director +65 67967235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Olly Prayudi (National Ratings) Analyst +62 21 2902 6412 Fitch Ratings Indonesia Prudential Tower 20th Floor Jl. Jend. Sudirman Kav.79 Jakarta 12910 Secondary Analysts Olly Prayudi (International ratings) Analyst +62 21 2902 6412 Nitin Soni (National Ratings) Associate Director +65 67967235 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. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Applicable criteria, “Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage� 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. 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