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May 28 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Indonesia-based PT Profesional Telekomunikasi Indonesia's (Protelindo) Long-Term Foreign Currency Issuer Default Rating at 'BB'. The Outlook has been revised to Positive from Stable. Simultaneously, the agency has also affirmed Protelindo's National Long-Term Rating, National senior unsecured rating, and rating on its IDR1trn senior unsecured bond at 'AA-(idn)'. The Outlook for the National Long-Term Rating has also been revised to Positive from Stable.
'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.
KEY RATING DRIVERS
Positive Outlook: The change in Outlook reflects Fitch's expectation that Protelindo will be able to gradually improve its tenancy mix while maintaining FFO-adjusted net leverage below 3.5x. With more than 3,000 telecommunications towers built since 2011, the company's EBITDA has nearly doubled to IDR2.6trn (USD229m) in 2013 from IDR1.4trn in 2011. Protelindo is currently the largest independent tower company in Indonesia with more than 10,000 towers. Its FFO-adjusted net leverage has fallen to 2.9x from 3.4x over the last two years.
Customer Portfolio Key to Upgrade: Protelindo's revenue composition has been gradually changing with higher contribution from investment-grade telcos - PT Telekomunikasi Selular (AAA(idn)/Stable), PT XL Axiata Tbk (XL, BBB/Stable), PT Indosat Tbk (BBB/Stable) and PT Telekomunikasi Indonesia (BBB-/Stable). These operators contributed 47% of Protelindo's revenue in 2013, compared with less than 30% in 2011. Protelindo's tenancy mix also benefited from the completion of the acquisition of PT Axis Telecom by XL in March 2014. Fitch expects the proportion of revenue from investment-grade telcos to continue to rise as they continue their network expansion plans.
Declining Contribution From Weaker Tenants: At the same time, Protelindo became less reliant on PT Hutchison 3 Indonesia, which accounted for 36% of Protelindo's revenue in 2013, down from 43% two years ago. Protelindo has also become less exposed to Code Division Multiple Access (CDMA) operators such as PT Bakrie Telecom Tbk (BTel; C) and PT Smartfren Telecom Tbk (Smartfren; CC(idn)), which are struggling to gain market shares. The combined exposure to BTel and Smartfren fell to 15% in 2013 from 21% in 2011.
Based on our analysis, cessation of payments from CDMA operators could result in FFO-adjusted net leverage rising above 3.5x. Nonetheless, the overall tenancy risk is partially mitigated by the agency's view that telecom operators generally consider tower lease obligations as a priority above debt service because of the need to continue providing service to subscribers.
Acquisition Risk Declines: Following the company's expansion and improvement in its financial metrics, the risk that the company will undertake a sizeable debt-funded acquisition that could materially impair credit metrics has declined. Fitch estimates that the company can acquire a portfolio of 5,000 towers in 2015 without material deterioration in its credit profile. In our forecasts, we have assumed the company will build more than 1,250 towers and acquire more than 500 towers each year throughout the rating horizon. The company's significant cash holding of IDR1.5trn at end-2013 provides liquidity for expansion activities.
High Cash Visibility: Protelindo's revenues are highly visible from its long-term lease agreements with typical contract length of 10 years. At end-2013, the company had an EBITDA margin of 82% and positive free cash flows of IDR222bn and contracted revenue was IDR27.3trn. Fitch believes that non-renewal risk is mitigated because operators seek to minimise coverage disruption and expenses associated with relocation.
Positive: Future developments that could lead to positive rating actions include:
- FFO-adjusted net leverage remains below 3.5x and investment-grade telcos (excluding Hutchison 3 Indonesia) contribute around two-thirds of revenues.
Negative: Future developments that could individually or collectively lead to revision of the Outlook to Stable include:
- Weakening of Hutchison Whampoa Limited's (A-/Stable) commitment to Hutchison 3 Indonesia leading to the latter not honouring its contractual commitments to Protelindo.
- A debt-funded acquisition of another tower portfolio or lease defaults by weaker telcos leading to deterioration in FFO-adjusted net leverage to over 3.5x on a sustained basis