Asia-Pacific Telecom Sector Well-Positioned to Manage Risks

Debt ratings agency, Fitch Ratings stated today that its overall outlook for the Asia-Pacific telecommunications sector in 2008 is stable, with 24 out of its total 28 rated telecommunications issuers bearing a Stable Outlook. Highlighting a newly published report, the agency outlines its expectations on how key financial metrics will move for 26 operators across Asia-Pacific in 2008, concluding that while revenue growth is likely to slow, cash flow from operations (CFO) and free cash flow (FCF) after dividends are likely to rise on aggregate.

Nevertheless the agency cautioned that it expects free cash flow to actually fall for half of its rated operators across Asia-Pacific.

"While 24 out of our 28 rated telecom issuers have a Stable Outlook, and average leverage levels are expected to remain flat at 1.2x, this is not to say that the sector will be quiet, but rather reflects our view that the operators are relatively well-positioned to manage the risks," says Matt Jamieson, senior director and head of Fitch's Asia-Pacific telecommunications, media and technology team. Fitch believes the overall themes for 2008 will be competition, regulation, M&A and new technologies.

Notable exceptions to the Stable Outlook include Korea-based Hanaro Telecom, an entity Fitch recently upgraded to 'BBB+' from 'BB' following SK Telecom's acquisition of a controlling stake, for which it was assigned a Positive Outlook in view of the potential for an even closer level of integration between the two entities. In addition, Advanced Info Service (AIS) and Total Access Communication in Thailand are both on Rating Watch Negative, as Fitch awaits a newly elected government in 2008 to clarify policy, regulatory and legal risks which increased in 2007. In Sri Lanka, the agency is concerned about the weakened macroeconomic environment and security situation, and accordingly, Sri Lanka Telecom is assigned a Negative Outlook.

Mr. Jamieson emphasised that "a key aspect of our report is the upfront inclusion of summary tables detailing Fitch's view of how revenue growth, EBITDA margins, leverage, CFO, capex, dividends and FCF are likely to trend in 2008", for the 26 operators across Asia-Pacific where Fitch's financial forecasts are current. "So rather than merely reviewing 2007's financial performance, we are also providing a greater degree of clarity on our financial forecasts for 2008 which form an important part of our rating process," he added.

Specifically, Fitch expects average revenue growth to slow to 5.2% in 2008 from 9.4% in 2007, largely associated with declines in fixed and mobile average revenue per user (ARPU) as competitive and regulatory factors force tariffs downwards.

Nevertheless, Fitch expects a number of operators in the emerging markets to record strong revenue growth in 2008, including China Mobile, PT Excelcomindo Pratama (Excelcom) and PT Indosat Tbk (Indosat). EBITDA margins are likely to be stable overall, but Fitch expects downward pressure for the Indonesian operators, Telecom Corporation of New Zealand, KT Corporation, SKT and SLT.

Fitch also expects positive FCF growth exceeding 10% in 2008 to be recorded by China Mobile and China Netcom Group. Other operators expected to record strong positive FCF for 2008 in absolute terms include China Telecom Corp., Singapore Telecommunications, Philippine Long Distance Telephone Company, NTT Corporation, KT, SKT, and Chunghwa Telecom. On the other hand, Fitch expects negative FCF (after dividends) in absolute terms to be registered by Telstra and TCNZ; Fitch's four rated telecommunications operators in Indonesia; and Telekom Malaysia.

The 19 page report can be downloaded from the Fitch website (free registration required).

Posted to the site on 29th February 2008