July 11, 2017 / 7:08 AM / 8 months ago

Fitch Affirms Indonesia's Telkom at 'BBB-', Outlook Positive

(The following statement was released by the rating agency) SINGAPORE, July 11 (Fitch) Fitch Ratings has affirmed PT Telekomunikasi Indonesia Tbk's (Telkom) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) as well as its foreign-currency senior unsecured rating at 'BBB-'. The Outlook on the IDRs is Positive. KEY RATING DRIVERS Sovereign Caps Ratings: Telkom's IDRs are constrained by the Indonesian sovereign (BBB-/Positive) due to the state's majority shareholding of 52.1% as of end-March 2017, and the significant influence over Telkom's key operating and financial policies through control of the board. Telkom is also strategically important as Indonesia's largest fixed and wireless operator, capturing almost half of the nation's mobile subscriber base as of end-March 2017. Strong Credit Profile: Telkom continues to exhibit a robust credit profile, underpinned by its solid market position in the domestic mobile and fixed-line markets, low leverage and wide operating EBITDAR margin of over 50%. Rating headroom for Telkom's IDRs remains large, although FFO-adjusted net leverage is likely to increase to around 0.7x in 2017 and 2018 (2016: 0.5x) on high capex needs and dividend commitments. We expect high-single-digit revenue growth and operating EBITDAR margin of around 50%, supported by data monetisation initiatives through a reduction in mobile-data allowances, and rational pricing in the fixed broadband segment. FCF Deficit: Fitch expects Telkom's cash flow from operations of IDR40 trillion-42 trillion in 2017 and 2018 may not be sufficient to fully cover capex and dividend commitments. Capex/revenue is likely to be stable at around 25%, as further investment in long-term evolution (LTE) networks offsets slowing fibre broadband expansion. After an initial push to expand its fibre network to over 16 million homes-passed at end-2016, Telkom is now planning to monetize its existing homes-passed instead of building new ones. We view this as a positive development for the domestic fixed broadband market. Further capex may stem from participation in a possible spectrum auction of the 2100MHz and 2300MHz frequency bands in 2H17, but we believe this should not have a major impact on Telkom's credit profile. M&A Opportunities: The prospect of mergers and acquisitions (M&A) remains, in light of Telkom's growth ambitions outside Indonesia. However, Fitch does not expect Telkom to undertake large debt-funded acquisitions which could have a negative effect on its credit profile - given its conservative nature and the lengthy approval process for state-owned firms. Future tower monetisation provides added financial flexibility to the company, although sale of state-owned assets is likely to require a lengthy approval process by the government. DERIVATION SUMMARY Telkom's IDRs continue to be capped due to the strong links between the company and its majority owner, the Indonesian sovereign (BBB-/Positive), which exerts significant influence over the company's key operating and financial decisions through control of the board. Telkom's standalone profile is at least two notches higher than its IDR, given its strong market position in Indonesia's fixed-line and mobile markets, wide EBITDA margins and low net leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to increase at 7%-8% a year in 2017-2019 driven by data services (2016: 13.5%); - Operating EBITDAR margin of around 50%-52% in 2016-2017 due to data-led substitution of more profitable voice and text services (2016: 52.9%); - Annual cash capex/revenue of around 25% in 2016-2017 (2016: 25.1%); - No significant debt-funded M&A or divestment; and - Dividend payout ratio of 70% in 2017-2019, in line with the historical average of 60%-73%. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Upgrade in the sovereign's IDRs - Weaker links between the government and Telkom. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action, such as the Outlook being revised to Stable, include: - Revision of the sovereign's IDRs Outlook to Stable from Positive. For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 21 December 2016: The main factors that, individually or collectively, could trigger positive rating action are: - A strengthening of the external balances, making Indonesia less vulnerable to sudden changes in foreign-investor sentiment, for instance through lower commodity export dependence or structurally higher foreign direct investment inflows. - Continued improvement of the business environment and governance standards. - Maintenance of sustainable GDP growth at a higher level than rating peers. The rating Outlooks are Positive. Hence, Fitch does not anticipate a high probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are: - A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties. - A rise in the public debt burden, for example caused by breaching the budget-deficit ceiling. LIQUIDITY Strong Liquidity: Telkom's unrestricted cash of IDR34 trillion at end-March 2017 is sufficient to meet debt maturities of IDR11 trillion over the next 24 months. We expect liquidity to remain strong, given its robust financial position and strong access to capital markets and local banks. Telkom has low exposure to foreign-currency debt, with 93.9% of its IDR27.8 trillion borrowings in rupiah, 3.6% in US dollar and the remaining 2.5% in yen. 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 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation 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. 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