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Fitch Affirms Turkcell at 'BBB-'; Outlook Stable
Published on:
Fitch Ratings has affirmed Turkey-based Turkcell's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', both with Stable Outlooks.
The affirmation reflects Turkcell's market share (54% in Q1, 2011) in the domestic mobile telecoms sector despite elevated competition, mainly on the pre-paid front, strong credit metrics compared with its peers in the region despite the difficult operating environment and pressure on operating margins in Turkey, and the rising political and regulatory pressure on the company.
The ratings are constrained by corporate governance issues relating to continued shareholder disagreements over management control of the company and the board structure. The ongoing uncertainty about the company's board and shareholder structure, with major shareholders in various disputes in international courts, is not expected to be resolved in the near term. Fitch notes that the final outcome and shareholder structure will influence the ratings; and may pressure the ratings if the final outcome is to the detriment of the day to day operations or financial policies of the company.
Turkcell's operating performance in 2010 was affected by the operational improvement at Astelit (Ukrainian mobile subsidiary) and Superonline levels, and an improvement in the underlying economy that offset some of the negative impact of increased competition, and regulatory pressures in the form of mobile termination rate cuts and price caps for the company's existing tariffs. Fitch believes that Turkcell's EBITDA margin may contract further by financial year-end 2011 (FYE11), as indicated by the EBITDA margin of 29.7% at Q410 and 29.5% at Q111. The agency notes that rising mobile internet & service revenues will not offset the loss in voice ARPU in the mid-term, especially in a lower pricing environment.
The heightened competition following the introduction of mobile number portability has had only a minimal impact so far on Turkcell's market share. However, local competition from Vodafone Group and Avea has increased and Fitch does not expect the level of competition to return to normal in the medium term as the market seems to have matured at the current 85% penetration rate. The agency factors into its ratings the expectation that Turkcell may continue to lose prepaid subscribers in 2011-12 (1.9 million net loss in FY10) but will remain the leading player at around 50% market share at FYE11, due to its successful retention policies and scale. The net adds on the post-paid segment (1m additions at Q111 since Q409) have helped support Turkcell's blended ARPUs over the past five quarters but Fitch also expects growing pricing pressure in this segment.
The company has had a net cash position since 2005 and generated free cash flow (FCF) on an annual basis, although the 3G license fee of EUR350m in 2009 and related capex led to negative FCF before dividends in 2009. The company generated 10% FCF before dividends as a percentage of sales at FYE10. Fitch notes that that the company may pay aggressive dividends despite lower operating profitability due to its high net cash position, but does not expect a significant deterioration in leverage metrics. The average debt maturity is two years, and USD3.1bn cash limits exposure to refinancing risk and interest rate fluctuations.
Fitch considers that Turkcell will continue to face a difficult operating environment over the next year and potentially beyond. However, the agency gains comfort from the headroom provided in the rating by Turkcell's conservative financial policies, and Fitch's assessment that management, based on its track record, is likely to be able to mitigate the negative effects of the operating headwinds. Turkcell has sufficient headroom in its 'BBB-' ratings to accommodate modest margin deterioration in the medium term without negative rating action.
Other concerns are tax investigations, legal issues with Turk Telekom, which the company has partly provisioned for, and regulatory intervention on existing tariffs. Material loss of market share or significant decline in ARPUs that impact operating margins negatively and result in significantly higher leverage metrics would be negative for the ratings. Significantly increased leverage, following aggressive acquisitions in the MENA region or special dividend payouts would also put downward pressure on the ratings.
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