(The following statement was released by the rating agency)
June 29 -
Summary analysis -- Telekom Malaysia Bhd. ------------------------- 29-Jun-2012
CREDIT RATING: A-/Stable/-- Country: Malaysia
Primary SIC: Communications
Mult. CUSIP6: 87942U
Credit Rating History:
Local currency Foreign currency
21-May-2009 A-/-- A-/--
02-Sep-2004 A/-- A-/--
The rating on Malaysia-based telecom operator Telekom Malaysia Bhd. (TM) reflects the company’s dominant position in the domestic fixed-line, data, and broadband markets, and its stable cash flows. A decline in TM’s traditional voice fixed-line business and its limited cash flow diversity partly offset these strengths.
We view TM’s business risk profile as “strong”. TM’s strong operating cash flows are attributable to its dominant fixed-line business, and Malaysia’s stable economic and regulatory environment. TM has a market share of more than 95% in the fixed-line telephony and broadband segment. It also accounts for about 50% of Malaysia’s overall broadband revenue. The company has rolled out Malaysia’s high-speed broadband (HSBB) network to 1.22 million premises, securing about 30% take-up for its triple play (IPTV, internet and phone) Unifi services by March 31, 2012. Nevertheless, we expect competition to increase over the next 12 months as wireless players leverage on TM’s HSBB network to provide bundled services.
We expect the company to maintain its revenue growth and EBITDA margins in 2012. TM’s operating performance has stabilized with the growth in internet, multimedia, and data services, which have more than offset a consistent decline in voice revenue. In 2011, the company’s revenue increased 4% while voice revenue dropped 3%. Its EBITDA margins marginally improved to 33% in 2011 from 32% in 2010
TM’s financial risk profile is “intermediate”. The company’s debt-to-EBITDA ratio has remained at 1.5x-1.7x over the past three years. This range is after adjusting TM’s debt with its cash reserves exceeding Malaysian ringgit (MYR) 1.5 billion, which we believe is a sufficient minimum cash reserve for the company’s operations. TM also maintains positive free operating cash flow. It funds capital expenditure, including for the HSBB network, out of internal cash flows as well as proceeds from noncore assets divestitures, such as its stake in Axiata Group Bhd. (BBB/Positive/--; axA+). The government also provides support to TM for the HSBB network. The government will fund MYR2.4 billion (nearly 21%) of the network’s total estimated cost of MYR11.3 billion.
We expect TM’s financial metrics to weaken in 2012 due to its planned capital repayment of MYR1.1 billion. We anticipate that the company will complete the repayment over the next three months. As a result, TM’s debt-to-EBITDA ratio will deteriorate to about 1.8x, which still provides a cushion at the current rating level. However, the company’s leverage in terms of debt to capital will materially increase from 38% as of Dec. 31, 2011.
We assess the stand-alone credit profile of TM to be ‘a-'. In accordance with our criteria for government-related entities, we believe the likelihood of extraordinary government support in the event of financial distress is “moderately high”. Our view is based on our assessment of TM‘s:
-- “Important” role for the government of Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1; axAAA/axA-1). TM has an important socio-economic role in the development of the country’s telecommunications infrastructure projects.
-- “Strong” link with the government, which indirectly owns about 51% of the company, primarily through Khazanah Nasional Bhd.’s 28.7% holding in TM.
We assess TM’s liquidity as “strong”, as defined in our criteria. We expect the company’s sources of liquidity to exceed its uses by more than 1.5x during the next 24 months. We anticipate that TM’s net liquidity sources will remain positive even if EBITDA declines by 30%. Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources include cash balance of MYR4.2 billion as of Dec. 31, 2011, and our projection of funds from operations of about MYR3 billion annually over the next two years.
-- Uses of liquidity include debt of MYR7.7 million due in the next 12 months and capital repayment of about MYR 1.1 billion.
-- Uses also include our expectation of capital expenditure of MYR2.6 billion, and our expectation of dividend distribution of MYR0.7 billion. However, we believe the company has flexibility with respect to its capital expenditure and dividend distribution in case of distress.
The stable outlook reflects our view that the growth in TM’s nonvoice services, mainly from broadband and data, will continue to offset the gradually declining revenue from its fixed-line telephony operations. The outlook also factors in our expectation that debt will not materially increase to fund either capital expenditure or any special dividend payments.
We could lower the rating on TM if higher-than-anticipated capital spending and dividend payouts weaken the company’s financial metrics, including the ratio of adjusted debt to EBITDA approaching 2.5x.
We may raise the rating if the company completes the HSBB rollout, maintains robust profitability and margins, preserves its strong liquidity, and improves its financial performance, such that it has a ratio of adjusted debt to EBITDA of less than 1.5x on a sustained basis.
The long-term local currency rating on TM would not be affected if we lower or raise the local currency sovereign rating on Malaysia by one notch. But a lowering of the long-term foreign currency sovereign rating could prompt us to lower the long-term foreign currency rating on the company.