August 30, 2017 / 8:34 AM / a year ago

Fitch Affirms Globe Telecom at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, August 30 (Fitch) Fitch Ratings has affirmed Philippines-based Globe Telecom, Inc.'s (Globe) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-'. The agency has also affirmed its senior unsecured rating at 'BBB-' and National Long-Term Rating at 'AAA(phl)'. The Outlook is Stable. KEY RATING DRIVERS Net Leverage May Rise: The Stable Outlook reflects our expectation that Globe's FFO adjusted net leverage may increase to around 3.0x in 2017-2019 (2016: 2.4x), within the level at which Fitch would consider negative rating action. We anticipate the company will draw down additional debt to fund its ongoing negative free cash flow (FCF) due to increasing capex investments and ongoing dividend commitments. Globe's debt increased to PHP124 billion in 1H17 (end-2016: PHP106 billion); part of which was used to pay a portion of the PHP6.6 billion final instalment for its share of San Miguel Corporation's (SMC) telecommunications assets. Increasing Capex: Its capex/revenue ratio is likely to stay elevated at close to 30% in 2017-2019 (2016: 29.1%) due to aggressive expansion in its long-term evolution (LTE) network and fixed-line infrastructure. Globe is looking into the possibility of raising its capex to USD850 million this year, from USD750 million previously. The company aims to expand its mobile service to 95% of the Philippines' total cities municipalities by end-2018, and its broadband infrastructure by rolling out high-speed lines to 2 million households by 2020 (end-2016: 0.3 million). Mid-Single-Digit Growth: Our forecasts assume revenue growth of mid-single-digit percentages in 2017-2019 (2016: 5.2%), which is higher than our forecast of flat-to low-single-digit growth for PLDT Inc. (BBB/Stable). We believe Globe's higher average revenue per user for post-paid subscribers should translate into stronger data monetisation and market share gains. Globe has successfully grown its mobile revenue share to 52% in 1H17, surpassing PLDT. However, it still lagged behind its peer in terms of telecom revenue share at 45%. Stabilising Competition, Wireless Strategy: The shift in PLDT's strategy to focus more on profitability rather than market share, and its growing fixed-line business should lead to stable competition in the mobile market and ease pressure on EBITDA margins in the telecoms sector. Globe plans to accelerate the deployment of LTE sites, utilising its newly acquired 700MHz and 2600MHz spectrum to capture growth in the home broadband market and to address its fixed-line network limitations. Nevertheless, we see long-term opportunities for fibre backhaul and faster-speed fibre broadband services amid the proliferation of video streaming and use of multiple devices in the home. Margin Dilution: Fitch forecasts 40% EBITDA margin for 2017 (2016: 41.8%), in line with management's estimates, and a decline of 80bp-100bp over the next two years, as stable competition offsets some of the changes in revenue mix. We see challenges from over-the-top (OTT) substitution in a predominantly prepaid market such as the Philippines, which is likely to hasten the shift from traditional voice and messaging services to lower-margin data service. DERIVATION SUMMARY Globe's ratings are underpinned by its established position as the second-largest telecom operator in the Philippines' duopoly market and its moderate net leverage of around 3.0x. The company's closest domestic peer, PLDT, is better positioned in terms of its larger scale - supported by a stronger fixed-line offering, lower net leverage of around 2.5x, better liquidity profile and higher pre-dividend FCF margins. Globe's regional peer, Indian telco Bharti Airtel Limited (Bharti, BBB-/Stable) is also rated 'BBB-' for its revenue diversity, but Bharti's leverage thresholds are much tighter at 2.5x due to the intense competition and regulatory risk in India. No country-ceiling, parent/subsidiary or operating environment aspects impact the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue to grow by mid-single-digits in 2017-2018 - operating EBITDA margin of around 40% in 2017-2019 (2016: 41.8%) - annual capex of PHP39 million-40 million in 2017-2019 - dividend payment of 77% of prior year's core net income, in line with its dividend policy of 75%-90% (2016: 77%) - final payment of PHP6.6 billion for Globe's remaining 25% of the acquisition price for SMC's telecommunications assets that was paid in May 2017. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Although not probable in the next year or two due to high leverage, positive rating action may arise from the competitive environment easing, leading to FFO adjusted net leverage declining to below 2.5x (from 2.0x previously) on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Debt-funded acquisitions, or a sharp deterioration in the company's operating profile leading to FFO adjusted net leverage rising above 3.5x on a sustained basis, may lead to negative rating action. The revisions in the leverage guidelines reflect our updated view that a 1.5 turn on leverage between upgrade and downgrade guidelines was too wide, and that a 2.5x upgrade guideline is more in line with Fitch's guidelines for PLDT and our assessment of the business risk differential between the two companies. LIQUIDITY Refinancing to Support Liquidity: Fitch expects Globe to partially refinance its short-term maturities of PHP13.9 billion as at end-June 2017 due to its unrestricted cash balance of PHP9.5 billion. However, liquidity is supported by its access to local banks and the retail bond market as the company has a solid financial and market position. Globe's total debt of PHP124 billion was mostly denominated in Philippine pesos, with 10% in US dollars. Dollar-linked revenue provides a natural hedge for Globe, contributing 10% of revenue (1H16: 12%). Contact: Primary Analyst Janice Chong Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +612 8256 0307 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(phl)' for National ratings in the Philippines. Specific letter grades are not therefore internationally comparable. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here 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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