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Fitch Affirm Indonesia's Telkom at 'BBB-'; Outlook Stable

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Fitch Ratings has affirmed Telekomunikasi Indonesia's (Telkom) Long Term Foreign and Local Currency Issuer Default Ratings (IDRs), as well as its senior unsecured rating at 'BBB '. The Outlook is Stable.

­Fitch said that Telkom's ratings remain constrained by Indonesia's FC and LC IDRs of 'BBB-' due to the government's effective majority (52.5% at end-June 2012) shareholding and significant influence over the company. Fitch believes that Telkom is strategically important to the government as a fixed-line incumbent and dominant wireless and broadband operator.

Telkom's ratings have significant headroom given its strong credit metrics. It has low funds flow from operations (FFO)-adjusted net leverage (end-June 2012: 0.3x), solid post-distribution free cash flow (FCF) generation and high operating EBITDAR margins of over 50% relative to other Asia-Pacific incumbent operators.

Fitch believes that Telkom's 2012 operating EBITDAR margins will decline, due to greater competition and a changing revenue mix with a higher contribution from a less-profitable data segment. During 2010-11, Telkom's key competitors, Indosat and XL Axiata, gained wireless market share from Telkom's wireless subsidiary, Telkomsel.

Further, Fitch expects Telkom's post-distribution FCF generation margin will decline to 1%-3% in 2012 (2011: 10%) due to higher capex of IDR19trn (2011: IDR14.6trn) to roll-out the fibre-based network and to increase data coverage and capacity at its wireless subsidiary. All these have been factored into Telkom's ratings.

Telkom's rating headroom may be reduced in case of a large debt-funded M&A transaction. During the last two years, Telkom has withdrawn from discussions on two transactions - one for a Cambodian telecom business and second with Pacnet. Telkom's credit metrics may also deteriorate if Telkom uses debt to buy out Singapore Telecom's 35% stake in Telkomsel. However, SingTel has shown little willingness to sell this stake currently.

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Tags: telekomunikasi indonesia  telkomsel  Indonesia