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Fitch Affirms Finnet Indonesia at 'A(idn)'; Stable Outlook
February 24, 2017 / 9:49 AM / 10 months ago

Fitch Affirms Finnet Indonesia at 'A(idn)'; Stable Outlook

(The following statement was released by the rating agency) JAKARTA, February 24 (Fitch) Fitch Ratings Indonesia has affirmed PT Finnet Indonesia's (Finnet) National Long-Term Rating at 'A(idn)' with a Stable Outlook. The affirmation reflects Finnet's conservative financial profile, stable cash flow, and strong operational linkage and moderate strategic linkage with its ultimate parent, PT Telekomunikasi Indonesia Tbk (Telkom). The rating continues to reflect the company's small operational scale, with EBITDA that is lower than that of peers on the National rating scale. 'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher-rated category. KEY RATING DRIVERS Linkage with Telkom: Finnet's rating benefits from a one-notch uplift due to linkages with Telkom, which indirectly holds a 60% of the company. Evidence of parental support includes provision of a stand-by shareholder loan from its direct shareholder, PT Multimedia Nusantara (Metra), which is wholly owned by Telkom. In addition, IDR200bn of Finnet's medium-term notes were fully subscribed by Telkom's pension fund. We also took into consideration Finnet's growing importance to Telkom's business plans in our assessment of the parent-subsidiary linkage. Stable Cash Flows: We expect the bill payment aggregator business to continue to account for more than 95% of Finnet's revenue and remain the cash flow driver in the medium term. About 90% of this segment's revenue is derived from Telkomsel's prepaid vouchers sales, which we expect to be stable and able to mitigate the concentration risk. Telkomsel, which is 65% owned by Telkom, is the leading mobile operator in Indonesia in terms of subscribers. It recorded subscriber base growth of about 10% yoy in 9M16. Finnet will benefit from Telkomsel's growth, as well as the shift from traditional to modern channels for sales of prepaid vouchers as more subscribers are exposed into banking services and modern trade channels. Conservative Financial Profile, Adequate Liquidity: We expect Finnet's credit profile to remain conservative despite increasing working capital needs. We expect FFO-adjusted leverage to decrease to below 2x in 2017 and remain below 2x through to 2020, and FFO-interest coverage to improve to above 5x over the same period. Finnet is likely to generate more than IDR100bn in cash flow from operations (CFO) in 2017 to adequately cover capex and dividend payments. Finnet also still has unutilised bank lines and shareholder loans of IDR249bn that are available until the end of 2017. Lower Margin in New Business: The bill payment aggregator business started in 4Q15, and expanded substantially in 2016. Expansion into sales via modern, non-bank channels has affected overall margin, as these have lower pricing spread, in line with the industry. While we expect pricing and the share of sales via modern channels to stabilise, risks of further margin decline remain. Lower margin may affect cash flow generation and potentially delay deleveraging. DERIVATION SUMMARY There are no directly comparable peers in the same industry rated on the Indonesian national scale, so Fitch has compared Finnet to companies in other sectors, such as PT Berlina Tbk (Berlina, A-(idn)/Stable). Berlina has relatively higher margins, but it also has higher leverage and lower cash flow coverage. Fitch assesses Finnet's credit profile to be similar to that of Berlina as both entities have comparable EBITDA, and generate cash flows from transactions with entities that have strong financial profiles. Finnet's rating also includes a one-notch uplift from Finnet's standalone rating of 'A-(idn)'. The uplift reflects a moderate linkage between Finnet and its ultimate parent, Telkom, which has provided tangible financial support in the form of shareholder loans. Finnet's business is also strategically important for Telkom, in line with the group's plan to increase its role in Indonesia's financial technology market. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Tariffs and transaction fees to remain stable in 2017-2020. - Payment aggregator transactions with Telkomsel to grow by 10% a year in 2017-2020. - Capex of IDR30bn-60bn in 2017-2020. - Dividend payout ratio of 50%. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Stronger linkage with Telkom, which may take the form of stronger operational ties between the two companies. - Further improvement in scale with EBITDA rising above USD50m (2016: USD15m) while maintaining FFO-adjusted leverage below 1.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Weakening linkage to Telkom. - FFO-adjusted leverage above 2x on a sustained basis. - EBITDA margin below 2.2% on a sustained basis. LIQUIDITY Wider Funding Access, Sufficient Liquidity: Finnet repaid its 11% five-year medium-term notes in 2016, and refinanced it with short-term bank loans. Finnet has also secured an uncommitted revolving credit facility with IDR300bn limit, of which it has used IDR220bn as at end-2016. The company also has access to shareholder loans that will still be available until November 2017. Finnet has used IDR82bn out of the IDR250bn limit. FULL LIST OF RATING ACTIONS PT Finnet Indonesia --National Long-Term Rating affirmed at 'A(idn)'; Outlook Stable Contact: Primary Analyst Olly Prayudi Associate Director +62 21 2988 6812 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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