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Fitch Affirms PT XL Axiata at 'BBB'/'AAA(idn)'; Outlook Stable
January 13, 2017 / 2:55 AM / a year ago

Fitch Affirms PT XL Axiata at 'BBB'/'AAA(idn)'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, January 12 (Fitch) Fitch Ratings has affirmed Indonesian mobile operator PT XL Axiata Tbk's (XL) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB'. Fitch Ratings Indonesia has simultaneously affirmed XL's National Long-Term Rating at 'AAA(idn)'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. 'AAA' National Ratings denote the highest rating assigned by Fitch on the agency's 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 Low Headroom for Axiata: XL's 'BBB' rating reflects the credit strength of its 66.4% parent, Axiata Group Berhad (Axiata). We continue to use the top-down method to assess XL, with Axiata as a basis, to reflect XL's strategic importance to its parent. XL is the largest contributor to Axiata's EBITDA and capex. However, our assessment of Axiata incorporates an expectation that the group will deleverage through a partial sale of its tower business, or some other means. If this does not happen, we would be likely to take negative rating action which would lead to corresponding action on XL. Deleveraging to 2.5x: Fitch expects XL's FFO-adjusted net leverage to improve to around 2.5x in 2017 and 2018 (2015: 4.2x), following a meaningful debt-reduction through a rights issue in June 2016. XL's debt including lease liabilities had declined to IDR18.9trn (2015: IDR29.4trn) by end-September 2016. In addition, its US dollar debt exposure had fallen to 30% (at end-September 2015: 64%); XL's only US dollar borrowings now comprise bank loans amounting to USD350m which have been hedged to maturity, reducing the exposure to any adverse forex fluctuations. Gradual Recovery: Our forecasts assume a slow recovery in revenue as the company refines its strategy to regain revenue share and drive meaningful EBITDA growth. We forecast low- to mid-single-digit revenue growth and an operating EBITDA margin of around 37%-38% (9M16: 38.8%) for 2017 and 2018. Operating EBITDA is likely to be stagnant at around IDR8trn, as higher tower leases and marketing expenses offset growth in data revenue. XL plans to improve data monetisation as early as 1Q17, and to grow faster than the industry by 3Q17. Competition to Stabilise: The industry's growing focus on improving data yields should help stabilise competition and gradually increase data monetisation. The second-largest Indonesian telco PT Indosat Tbk's (BBB/Stable) indicated plans to reduce bonus data allowances starting end-2016, which we feel is a positive move to drive more rational pricing and ease pressure on margins. FCF Deficit: XL's cash flow from operations in 2017 may not be sufficient to meet a higher annual capex budget of close to IDR7trn (2015: IDR4.6trn), given the company's emphasis on network improvements intended to reinforce its leadership strategy in data. Capex expansion will focus mainly on 4G expansion and to narrow the network coverage and quality gap between XL and market leader PT Telekomunikasi Selular (Telkomsel, AAA(idn)) outside of Java. We assume no dividend payout in 2017 and 2018. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Gradual recovery in revenue; to grow by low- to mid-single-digits after posting an expected 5% decline in 2016; - Competition to stabilise as telcos gradually rationalise bonus data allowance to drive monetisation; - Operating EBITDA margin of around 37%-38% in 2017-2018; - Average annual capex of around IDR7trn in 2017-2018; - No dividend payments until 2019; - No M&A or divestments; and - Average interest cost of around 9.5% per annum. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include: - An upgrade of Fitch's credit view of Axiata will benefit XL's international ratings. However, an upgrade of the Foreign-Currency IDR would be contingent on Indonesia's Country Ceiling of 'BBB' being upgraded. XL's Foreign-Currency IDR is currently at the same level as the Country Ceiling. Negative: Developments that may, individually or collectively, lead to negative rating action include: - A downgrade of Indonesia's Country Ceiling, which would lead to a downgrade in XL's Foreign-Currency IDR - Weakening of linkages with Axiata - A downgrade of Fitch's credit view of Axiata. LIQUIDITY Reliant on Refinancing: We expect XL to refinance a portion of its debt when its fall due in 2017. As of end-September 2016, its IDR3.3trn cash balance is insufficient to cover short-term debt maturities (including lease liabilities) of IDR4.5trn over the next 12 months. However, we believe XL has reasonable refinancing ability, with access to local banks and capital markets. XL had reduced its US dollar debt exposure over the past one year with proceeds from the rights issue, and debt refinancing with rupiah-denominated sukuk. FULL LIST OF RATING ACTIONS PT XL Axiata Tbk Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook Stable National Long-Term Rating affirmed at 'AAA(idn)'; Outlook Stable IDR5trn sukuk ijarah programme affirmed at 'AAA(idn)' All outstanding issuance from the sukuk ijarah programme affirmed at 'AAA(idn)' Contact: Primary Analysts Janice Chong (International Ratings) Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Rufina Tam (National Ratings) Associate Director +6221 2988 6813 Secondary Analyst (International Ratings) Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Criteria for Rating Sukuk (pub. 16 Aug 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017496 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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