Fitch Affirms Telekom Malaysia Debt Ratings with a Stable Outlook
Published on: 24th Nov 2011
Note -- this news article is more than a year old.
By: Ian Mansfield
Fitch Ratings has affirmed Telekom Malaysia's Long Term Foreign Currency Issuer Default Rating (IDRs) and senior unsecured rating at 'A '. The Outlook is Stable.
The ratings reflect Telekom Malaysia's (TM) leading position in Malaysia's fixed-line, internet and data markets. As with many markets, Fitch expects voice revenue to decline, although internet and data revenue growth will compensate. The agency is forecasting that future operating EBITDAR margins will be stable above 30%. TM's liquidity remains strong with cash and equivalents of MYR3.3bn at Q311.
Despite strong operating cash flow, Fitch forecasts that high capex and a dividend payout ratio of 90% of profits after tax and minority income (subject to a minimum of MYR700m) are likely to lead to negative free cash flow (FCF) for at least the next two years. Nevertheless, credit metrics are not expected to deteriorate materially and the company has relatively high ratings headroom.
Khazanah National Berhad (Khazanah), the investment holding arm of the government of Malaysia, holds the largest single stake in TM with a direct shareholding of 28.7%, while other government-related agencies hold a combined 23.7% stake. Fitch believes that Khazanah influences TM's strategic decisions through its representation on TM's board of director, and that it monitors operations closely. The government has financially supported TM's high-speed broadband project through a private/public partnership arrangement by co-investing in 20% of the project, front-loaded in the first three years. Based on the links between TM and the government, the company's ratings benefit by a one-notch uplift from their standalone level of 'BBB+'.
A negative rating action is likely if capital management initiatives or significant debt-funded capex lead to funds from operations (FFO)-adjusted net leverage exceeding 2.0x, and/or if operating EBITDAR margins fall below 30% on a sustained basis. The company's standalone rating could be upgraded if FFO-adjusted net leverage falls to and is sustained below 1.0x, if EBITDAR margins improve to 35% and if the company generates positive post-dividend FCF on a sustained basis. However, if the TM's standalone ratings are upgraded to 'A-', the same level as the government, the company would no longer benefit from a notch uplift for government support.