April 20, 2017 / 1:40 AM / 9 months ago

Fitch Affirms Telkomsel at 'AAA(idn)'; Outlook Stable

(The following statement was released by the rating agency) JAKARTA, April 19 (Fitch) Fitch Ratings Indonesia has affirmed Indonesia-based PT Telekomunikasi Selular's (Telkomsel) National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable. The affirmation is based on our estimate that Telkomsel will maintain its market-leadership status in the Indonesian mobile telecommunications market. It consistently outperforms its competitors in terms of net subscriber additions, network expansion and financial profile. 'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country KEY RATING DRIVERS Market Leadership: Fitch expects Telkomsel to maintain its leadership position in terms of subscribers, revenue and network coverage - measured by the number of base transceiver stations (BTS) and area penetrated. Subscriber numbers and revenue are larger than the aggregates of its closest competitors PT Indosat Tbk (Indosat, BBB+/AAA(idn)/Stable) and PT XL Axiata Tbk (XL, BBB/AAA(idn)/Stable). In 2016, Telkomsel generated more than IDR86 trillion of revenue compared with less than IDR30 trillion for each of Indosat and XL. Telkomsel also had more than 173 million subscribers - far above Indosat with fewer than 86 million, and XL at fewer than 47 million. Extensive Network Advantage: Telkomsel had more than 129,000 BTS at end-December 2016 - while Indosat and XL had fewer than 85,000 each. We forecast that Telkomsel will spend more than IDR14 trillion in capex in 2017, of which 70% will be invested in 4G network expansion - much larger than our forecast capex for Indosat and XL at less than IDR9 trillion apiece. Telkomsel's aggressive 4G roll-out will help the company expand its subscriber base as smartphone adoption increases. Telkomsel added more than 21 million subscribers during 2016, while Indosat added 16 million and XL less than 5 million. Solid Revenue Growth: We forecast Telkomsel will sustain its solid revenue growth at a high-single-digit rate from a combination of subscriber growth and relatively stable average revenue per user (ARPU). The latter will be supported by Telkomsel's cluster-based pricing strategy - in which it prices selectively higher in regions where the company is a market leader. This has prevented a decline in Telkomsel's ARPU, where the figure remained relatively stable at IDR45,000 in 2016 (2015: IDR43,000) despite the shift in revenue composition towards data. Robust Financial Profile: Telkomsel's cash flow generation should remain solid in the next three years, with a strong EBITDA margin at around 55% (2016: 57.4%) - still higher than Indosat at less than 50% and XL at less than 45%. Fitch forecasts a free cash flow (FCF) margin of around 1%-3% in financial years 2017 (FY17, ending December 2017) to FY19 (2016: 11.4%) even after significant capex intensity of around 16% of revenue and aggressive dividend payment with a 90% payout ratio. The net cash position should be sustained, given the absence of additional debt-raising activity. Minimal Margin Narrowing: We expect gradual margin erosion at 50bp-100bp per annum during 2017-2019 since the proportion of the less-profitable data services will increase in Telkomsel's revenue mix - replacing traditional, more profitable services such as voice and SMS. Data revenue will continue to grow as the proportion of smartphone users rises. Data revenue represented nearly 32% of Telkomsel's revenue in 2016 (2015: 26.7%), and smartphone users made up less than 50% of subscribers. DERIVATION SUMMARY Telkomsel's credit metrics compare well with other-rated 'AAA(idn)' peers such as PT Profesional Telekomunikasi Indonesia Tbk (Protelindo). Both companies have a solid EBITDA margin, leading market position in their respective industries and solid FCF generation. Telkomsel's lower leverage and minimal revenue concentration risk offset the fact that it does not have long-term contracted cash flows like Protelindo. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - High-single-digit revenue growth annually in 2017-2019 - Gradual narrowing of the EBITDA margin at 100bp in 2017 and 50bp until 2019 as less profitable data services replace voice and text services. - Capex/revenue of 16% per annum - in which 70% will be spent for 4G network rollout. - Dividend payout ratio of 90% (2016: 90%) RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action No positive rating action is possible as the company is already at the highest level on the national rating scale. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A significant increase in shareholder return or a major debt-funded acquisition could lead to negative rating action. However, this is unlikely in the short- to medium-term term, given the large ratings headroom LIQUIDITY Solid Liquidity: We forecast Telkomsel to maintain its net cash position over FY17-FY19. The company had IDR19.6 trillion of unrestricted cash and IDR4.7 trillion in unutilised banking facilities against IDR6.3 trillion of total debt at end-December 2016. An ample cash balance will continue to be strengthened by excess cash from operations, with a FCF margin at around 1%-3%. Contact: Primary Analyst Olly Prayudi Associate Director +62 21 29886812 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta, Indonesia 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. 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