Nov 26 -
Summary analysis -- Pakistan Mobile Communications Ltd. ----------- 26-Nov-2012
CREDIT RATING: B-/Stable/-- Country: Pakistan
Primary SIC: Communications
Mult. CUSIP6: 695848
Credit Rating History:
Local currency Foreign currency
01-Apr-2010 B-/-- B-/--
26-Nov-2009 CCC+/-- CCC+/--
25-Aug-2009 B-/-- B-/--
20-May-2009 CCC+/-- CCC+/--
12-May-2009 SD/-- SD/--
16-Apr-2009 CC/-- CC/--
14-Nov-2008 B-/-- B-/--
07-Oct-2008 B/-- B/--
The rating on Pakistan Mobile Communications Ltd. (Mobilink) reflects the country and macroeconomic risks of Pakistan (B-/Stable/B) and our transfer and convertibility assessment of 'B-' for the country. The telecom industry in Pakistan is intensely competitive. Mobilink's leading market share, in terms of subscribers and revenue, in Pakistan's telecommunications industry and the company's improved operating and financial performance temper these weaknesses. We view the company's business risk profile as "vulnerable" and its financial risk profile as "aggressive."
In our view, Mobilink is exposed to the country and macroeconomic risk of Pakistan because the telecom player operates in a single market and relies on local financial markets for its funding. The company faces security risk, an unpredictable domestic political environment, and power shortages. Mobilink is also exposed to Pakistan's macroeconomic risk stemming from high inflation and high public and external debt. Nevertheless, the overall economic growth prospects for Pakistan remain moderate, in our opinion.
Despite the strong competition in Pakistan's telecom industry, we believe Mobilink can retain its market leadership by continuing to leverage on its established brand name and network coverage. According to the Pakistan telecommunications regulator, Mobilink has a 30.1% share of the wireless market as of June 30, 2012. Mobilink's management estimates its subscriber and revenue market share to be even higher, at 36.3%, based on a uniform subscriber definition to calculate the market share of all players. The company also benefits from the widest network coverage in Pakistan, covering 74.3% of the population.
We expect Mobilink's EBITDA margin to remain healthy over the next two years. The company's subscribers increased 7.7% for the six months ended June 30, 2012, compared with the same period last year, while its revenues were higher by 9.1%. Mobilink's EBITDA margin also improved to 38.8% from 36.5%, underpinning a stronger overall financial performance. These figures are after accruing management fees. The company's EBITDA margin would have been 42.3% if we exclude management fees.
In our base-case scenario, we expect Mobilink to continue to generate positive free operating cash flow (FOCF) and maintain a ratio of funds from operations (FFO) to total debt of about 38%-40% for the next two years. Our forecasts assume modest subscriber growth of 3%-6% and stable average revenue per user (ARPU). Our view is despite our anticipation that: (1) the company's margins and ARPU could weaken due to intense competition; and (2) the auction of 3G licenses could lead to additional borrowing. Mobilink used the cash on its balance sheet to pay the management fees in the first six months of 2012 against our earlier expectation of payment in 2013. We believe this was partly due to a delay in the auction of 3G licenses. We believe the management will determine the payment schedule for management fees based on the company's liquidity position and the headroom in its financial covenants. As a result of the payment, Mobilink's FOCF was lower than our earlier expectation, but the company still generated positive FOCF of Pakistan rupee (PKR) 5.6 billion. The ratio of FFO to total debt also improved to about 50% for the first six months of 2012, from 41.1% in 2011. Mobilink's financial measures are stronger than peers for the rating category.
We assess Mobilink's liquidity as "adequate," as defined in our criteria. We expect the company's sources of liquidity to exceed its uses by more than 1.2x over the next 12 months. We anticipate that Mobilink's net liquidity sources will remain positive even if EBITDA declines by 20%. Our liquidity assessment is based on the following factors and assumptions:
-- Liquidity sources include a cash balance of more than PKR3.5 billion as of June 30, 2012, and undrawn committed credit facilities of US$215 million as of Oct. 31, 2012.
-- Sources also include our projection of FFO of at least PKR25 billion for 2012.
-- The payment of deferred management fees of PKR5.7 billion relating to previous years paid to the parent Orascom Telecom Holdings S.A.E. (not rated) in the first half of 2012.
-- Uses of liquidity include debt maturities of PKR18 billion due in the next 12 months.
-- Uses also include our expectation of minimum capital expenditure of PKR10 billion, which we believe the company will require for maintenance.
Mobilink has an adequate cushion under its financial covenants, in our view. We believe the company has good relationships with local banks and access to local financial markets, which should provide financial flexibility. In our opinion, Mobilink benefits from additional financial flexibility as part of a larger group with parent Orascom Telecom and ultimate parent VimpelCom Ltd. (BB/Stable/--).
The stable outlook reflects the outlook on the sovereign credit rating on Pakistan. The outlook also reflects our expectation that Mobilink's business operations and financial performances will remain stable over the next 12 months.
We could lower the rating on Mobilink if we lower the transfer and convertibility assessment of Pakistan.
Conversely, we may raise the rating if we raise Pakistan's transfer and convertibility assessment. This assumes that the company maintains its current business and financial risk profiles.