We expect Telkomsel's operating performance to remain stable with easing of
competition and growth in data services. Also, the performance is stronger
than our earlier expectations. Revenue increased 10.6% for the nine months
ended Sept. 30, 2012, because of a 15.3% growth in non-voice revenue driven by
data services. At the same time, margins remained stable at 57% because lower
marketing expenses offset the higher operating expenses stemming from an
increase in the data access fee for Blackberry services. We expect Telkomsel's
margins to remain stronger than its regional peers'.
Telkomsel's "modest" financial risk profile reflects its conservative
financial policy, with a ratio of debt to capital of 9.6% as of Sept. 30,
2012. In addition, the company has strong cash flow protection measures. Its
ratio of funds from operations (FFO) to debt has been more than 150% for over
the past five years. Telkomsel continues to register large and stable positive
free operating cash flow (FOCF). We expect the company to distribute most of
its FOCF as dividends.
The Indonesian telecom market is competitive and susceptible to price-based
competition. The wireless subscriber growth has moderated because of a high
wireless penetration rate of more than 100%, including users who hold multiple
SIM (subscriber identity module) cards. Nevertheless, the top three players
dominate. PT Indosat Tbk. (BB+/Stable/--; axBBB+/--) has a market share of
about 20% and PT XL Axiata Tbk. (not rated) has about 16% share. We expect
future growth to be driven by demand for data services.
In line with our expectation, Telkomsel recently won an appeal in the Supreme
Court to reverse the bankruptcy ruling based on a petition filed by PT Prima
Jaya Informatika (not rated) in the Central Jakarta District Court. The
victory erases any potential risk Telkomsel might have faced on an adverse
Standard & Poor's Ratings Services' base-case scenario for Telkomsel indicates
a debt-to-EBITDA ratio of less than 0.3x and an FFO-to-debt ratio of more than
150% over the next three years. Our projections are based on the following
-- Revenue growth will accelerate to about 10% in 2012 and will remain at
a similar level in 2013 before declining to 7% in 2014.
-- EBITDA margins will be stable at about 57% over the next two years.
-- We expect capital expenditure at about 18% of revenue in 2012 and to
gradually decline to about 16% of revenue by 2014.
-- We have assumed that the dividend payout ratio will gradually increase
to 100% in 2014, from 85% in 2012.
We assess Telkomsel's liquidity as "strong," as defined in our criteria. We
expect the company's sources of liquidity to exceed its uses by more than 2x
over the next two years. We anticipate that net liquidity sources will remain
positive even if EBITDA declines by 30%. Our liquidity assessment is based on
the following factors and assumptions:
-- As of Sept. 30, 2012, Telkomsel's liquidity sources include cash and
cash equivalents of Indonesian rupiah (IDR) 6.8 trillion.
-- Sources also include our projection of FFO of about IDR26 trillion in
the next 12 months.
-- Uses of liquidity include debt due in the next 12 months of about
-- Uses also include minimum capital expenditure of about IDR5 trillion,
which we believe is required for maintenance of the network and other assets,
and our expectation of dividend distribution of about IDR5 trillion, even in
case of stress.
Telkomsel has significant headroom in its covenants. The company also benefits
from strong financial flexibility with a high level of unencumbered assets,
low debt, and its affiliation with Singapore Telecommunications.
The stable outlook reflects Telkomsel's solid market position and strong cash
flow generation, which could mitigate any potential competitive pressure over
the next couple of years.
We could raise the rating on the company if the T&C risk assessment on
Conversely, we could downgrade Telkomsel if a lowering of the sovereign rating
prompts us to lower the T&C risk assessment, or if Indonesia's country risk
heightens. We could also lower the rating on Telkomsel if shareholders'
initiatives, such as significant dividend payouts and debt-funded investments,
weaken the company's financial performance, such that its debt-to-EBITDA ratio
stays at about 2x on a sustainable basis.