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May 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Indonesia-based P.T. Telekomunikasi Selular's (Telkomsel) National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable. Simultaneously, Fitch has affirmed and withdrawn the following international scale ratings as they are no longer considered by Fitch to be relevant to the agency's coverage:
Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB'; Outlook Stable Long-Term Local-Currency IDR at 'BBB+'; Outlook Stable
Foreign currency senior unsecured rating at 'BBB'
'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
Solid Credit Profile: Telkomsel's ratings factor in its leading position in Indonesia's mobile market, with annual gross revenue of IDR60trn - higher than the combined revenue of the second- and third-largest Indonesian operators. Ratings have large headroom given its stable EBITDAR margin of over 55%, net cash position and its ability to generate free cash flow (FCF) margin of over 5%.
Data to Drive Revenue: Fitch expects Telkomsel's revenue to post high single-digit growth in 2015 driven mainly by fast-growing data services. Overall operating EBITDAR margin could decline by 100-150bps each year as data's contribution to total revenue grows and it replaces traditionally more profitable voice and text services. We forecast annual post-dividend FCF of at least IDR2trn-3trn despite capex investment around 20% of revenue to expand 3G services. Fitch expects Telkomsel to distribute around 80% of its net income in dividends, in line with its dividend policy.
During 2013, revenue and EBITDA grew each by 10% and operating EBITDAR margin remained resilient at 56% despite intense competition in the data segment, boosted by the introduction of text interconnection fees by the regulator in June 2012. The company added about 6.4 million subscribers and managed to maintain its blended average revenue per user at IDR37,000 per month.
Industry Consolidation: We believe that smaller telcos may have to consolidate as their business models are unsustainable at current tariff levels. Code Division Multiple Access (CDMA) operators, including PT Bakrie Telecom (C) and PT Smartfren Telecom Tbk (CC(idn)), continue to struggle to gain market share and face liquidity problems. PT Indosat Tbk (BBB/Stable) and market leader Telkom are likely to shut their CDMA segments and reallocate the spectrum for GSM use. The top-three telcos will capture most of the fast-growing data market given their strong position in voice and their ability to invest in data infrastructure.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A significant increase in shareholder return or a major debt funded acquisition could lead to a negative rating action on the National Long-Term Rating. However, this is unlikely in the short-to-medium term given the large ratings headroom.