Reuters logo
Fitch Affirms Smartfren at 'CCC(idn)'
September 27, 2017 / 5:38 AM / in 22 days

Fitch Affirms Smartfren at 'CCC(idn)'

(The following statement was released by the rating agency) JAKARTA, September 27 (Fitch) Fitch Ratings Indonesia has affirmed Indonesia-based PT Smartfren Telecom Tbk's (Smartfren) National Long-Term Rating at 'CCC(idn)'. 'CCC' National Ratings denote very high default risk relative to other issuers or obligations in the same country. KEY RATING DRIVERS Weak Cash Flow Generation: Fitch expects Smartfren's EBITDA to remain weak in the next 18-24 months. EBITDA will be below IDR350 billion in 2017 and 2018, which will be insufficient to cover annual interest expense of more than IDR600 billion. The company's weak EBITDA forces Smartfren to continuously rely on external funds to meet working capital, network investment and debt servicing requirements. Its EBITDA margin will decline to around 8% in 2017 after a temporary improvement in 1H17. Smartfren's 1H17 EBITDA margin was 11% due to average revenue per user (ARPU) growth to IDR33,000 (2016: IDR28,000) and lower operational costs from the gradual shutdown of its code division multiple access (CDMA) antenna since 4Q16. We expect further margin pressure starting from 2H17 as Smartfren's significant roll-out of a long-term evolution (LTE) network will increase its operational costs while subscriber numbers will remain relatively stagnant. LTE Investment Adds Liquidity Pressure: Capex requirement for the LTE network expansion will exacerbate Smartfren's cash flow pressure. Fitch believes that extensive network coverage is necessary to attract subscribers. Smartfren will have to invest significantly to remain competitive in the Indonesian telco industry. Smartfren is significantly behind in terms of nationwide network coverage with fewer than 20,000 base transceiver stations (BTS) compared with PT Indosat Tbk's (BBB+/AAA(idn)/Stable) 59,000 - although Smartfren's LTE BTS of more than 13,000 in 1H17 were already ahead of Indosat's 5,533. We estimate the company will spend around IDR2 trillion on capex in 2017 and 2018, which is significantly lower than PT XL Axiata Tbk's (BBB/AAA(idn)/Stable) IDR4.5 trillion per annum since 2015. Stagnant Subscriber Base: Subscriber acquisition will remain challenging for Smartfren in 2017 and 2018 due to competitive pricing in the Indonesian telco industry. The company's subscriber base has remained relatively stagnant since 2015, with 10.7 million in 1H17 (2015-2016: 11 million), despite the company's significant investment in its LTE network; the company's 4G BTS increased to more than 13,000 in 1H17 from around 9,000 in 2015. Smartfren needs a significantly larger subscriber base to generate profits which are commensurate with its network investment. We expect monetisation of current data users to be gradual and slow as the intense competition for subscribers among Indonesian telcos will make it more difficult. Uncertain Funding Source: We estimate that Smartfren's current funding sources will not be adequate to cover its short-term liquidity. At end-June 2017, the company had around USD60 million (IDR792 billion) in undrawn credit facilities and USD130 million (IDR1,716 billion) in available capex facilities. Smartfren has also fully utilised its mandatory convertible bonds (MCB) phase II of IDR9 trillion in 1H17 with a IDR1,400 billion issuance. The company is currently in talks with lenders for additional working capital and capex facilities. In the past, Smartfren's financial flexibility has been limited with liquidity mostly coming from MCB issuance and China Development Bank facilities. DERIVATION SUMMARY The rating at the lower end of the scale is largely driven by Smartfren's liquidity situation rather than peer comparison. Smartfren's rating reflects its weak cash flow generation and liquidity position. We expect the company's EBITDA generation in the next 18-24 months will not be sufficient to cover its interest expense. Smartfren's available borrowing facilities at end-June 2017 are not sufficient to cover its liquidity needs in the next 18-24 months. Poor cash flow generation forces Smartfren to rely on external liquidity sources to cover its cash shortfall for working capital, capex and debt servicing requirements. The rating also reflects the company's limited financial flexibility due to its high credit risk. Funding sources in the past have been limited mostly to the issuance of MCB and loans from China Development Bank. 'CCC' National Ratings denote very high default risk relative to other issuers or obligations in the same country. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Stagnant subscriber base at 11 million in 2017 and 2018 - Blended average revenue per user of IDR30,000 - 33,000 in 2017 and 2018 - EBITDA margin will improve to around 8% in 2017 and decline to around 6% in 2018 - Annual capex of around IDR2.0 trillion in 2017 and 2018 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: -The company's ability to fund its operations without any reliance on further MCB issuance Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Weakening liquidity or operating performance such that the company's ability to meet obligations appears unlikely LIQUIDITY Inadequate Short-Term Liquidity: Smartfren repaid its rupiah bonds in June 2017 using the funds from the issuance of MCB. At end-June 2017, Smartfren had around IDR162 billion of cash and cash equivalents and USD60 million (IDR792 billion) in undrawn working capital facilities from Equimark Investment Holding Ltd and Niven Holdings Limited. These facilities will not be sufficient to cover debt maturing within 12 months of IDR1,909 billion. Contact: Primary Analyst Olly Prayudi Director +62 21 2988 6812 Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Steve Durose Managing Director +61 2 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(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. 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 Corporate Rating Criteria (pub. 07 Aug 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures 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. 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below