Moody's Affirms Korea Telecom's Rating; Outlook Negative
Moody's Investors Service has affirmed Korea Telecom's A3 senior unsecured rating, after the company announced its preliminary results for 2012. The rating outlook remains negative.
On 1 February, KT said that its consolidated and reported operating income for 2012 fell 31% year-on-year to KRW1.2 trillion, with a noticeably small operating income of KRW51 billion in the fourth quarter.
"The decline in operating income was the result of KT's relatively high spending on marketing, owing to the intense competition for long-term-evolution (LTE) or 4G services. The company's depreciation charges and capex spending related to LTE investments also increased," says Yoshio Takahashi, a Moody's Assistant Vice President and Analyst.
"The continuous decline in fixed-line revenue, both telephony and broadband, as well as moderate revenue from its wireless business also weighed on the company's operating performance," he adds.
Consequently, KT's leverage, measured by debt/EBITDA, increased. According to 2012 preliminary results, its adjusted consolidated debt/EBITDA, after excluding finance subsidiary, KT Capital (unrated), was 2.3x-2.4x for 2012, versus 2.2x in 2011, and its adjusted consolidated EBITDA margin fell to 24% in 2012 from 25% in 2011.
While this was slightly higher than our expectation, the increase in leverage was partly the result of the consolidation of KT Rental (unrated) in 3Q 2012. Its debt was fully consolidated, while its profits were only partially consolidated.
"Although KT's credit metrics are currently weak for its rating, we expect its financial profile to show a moderate improvement in 2013 driven by a take-up in LTE subscribers," says Takahashi, who is also the Lead Analyst for KT.
Moody's expects growth in the firm's average revenue per user (ARPU) because of a larger LTE subscriber base to support its profit margins. Increasing regulatory pressures for telecom firms to cut back on aggressive marketing tactics should also help improve its margins.
In addition, as the ex-incumbent fixed-line operator, the company also owns sizable non-core assets, including properties and copper cables which it can monetize to lower its leverage.
Moody's will continue to monitor the company's ability to improve earnings and cash flow, and its progress in reducing leverage through a combination of asset monetization, controlled capex and management of marketing expenses over the next 6 months.
Moody's is concerned about: (1) the competitive environment in Korea's telecommunications industry, as firms are vying to increase their LTE subscribers; and (2) the uncertainties over the regulatory policies under the new administration of Park Geun-hye .
Given the negative outlook, an upgrade is unlikely in the near-to medium-term. However, the outlook could revert to stable, if KT manages its competitive position and improves its performance in the core telecom business whilst implementing measures to reduce its elevated financial leverage, measured by debt/EBITDA. Specific indicators that Moody's would consider include: adjusted EBITDA margins to return to 27% - 30%; total blended mobile ARPU to consistently rise above KRW35,000 - 36,000; and adjusted debt/EBITDA (excluding KT Capital) to fall below 1.9x - 2.0x on a sustained basis. Moody's also assume that KT will be able to continue with its handset receivables securitization program as currently structured.
Further downward pressure could emerge if KT fails to improve its performance in the core telecom business, such that: EBITDA margins remain below 25% and its total blended mobile ARPU remains below KRW33,000 on a consistent basis. In addition, its ratings will be pressured if KT's financial metrics further deteriorate such that its adjusted debt/EBITDA (excluding KT Capital) remains over 2.0x. Furthermore, if KT's ability to continue with its handset receivables securitization program as currently structured becomes limited, it could negatively affect its rating as associated borrowings will be brought back on KT's balance sheet, adversely impacting leverage.
KT is the largest provider of integrated telecommunications services in Korea in terms of revenue. It focuses on: fixed-line telephony; broadband internet access; data communication, mobile telecommunication, IPTV, leased-line and satellite, as well as system and network integration services.