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Fitch Affirms America Movil at 'A'; Outlook Stable

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Fitch Ratings has affirmed America Movil's (AMX) and Telefonos de Mexico, S.A.B. de C.V.'s (TMX) local and foreign currency debt ratings and senior unsecured notes at 'A'. Fitch has also affirmed AMX and Telmex Internacional (Telint) national scale ratings at 'AAA(mex)'.

The Rating Outlook is Stable.

­AMX's ratings reflect its position as the largest wireless service provider in Latin America with well-established multiple service platforms and solid network competitiveness and a high degree of geographical cash flow diversification, all of which support its consistent positive free cash flow (FCF) generation, ample financial flexibility, and solid liquidity. Ratings are tempered by increasing competitive and regulatory pressures in some of its key markets, recent increase in leverage due to acquisitions and shareholder distributions, as well as price pressures in its voice services.

Medium-term Leverage Improvement:

The ratings reflect AMX's commitment to achieve its medium-term net leverage target of 1.5x. The company is expected to keep financial discipline with respect to cash flow usage in order to achieve its financial target in the absence of any sizable acquisitions or shareholder return. As of June 30, 2015, AMX's net-debt-to-EBITDA ratio was 1.9x, which leaves limited ratings headroom at the current rating level, mainly due to the full-consolidation of Telekom Austria and a high level of shareholder distributions. Fitch forecasts this ratio to gradually recover over the medium term backed by stable positive FCF generation.

Pressures in Mexico:

Regulatory measures from the Mexican telecom sector reform, in which AMX was declared 'preponderant' during 2014, have negatively affected the company's Mexican operation. The unfavorable measures mainly include reductions in interconnection and national long-distance charges, as well as sharing of AMX's network infrastructure. As a result, during the first half of 2015 (1H15), the company's Mexican operation's revenues declined by 2% compared to a year ago, while the EBITDA margin fell to 42% from 44%. In addition, the entrance of AT&T should increase the competitive intensity over the medium to long term and further pressure AMX's profitability in Mexico. Positively, the impact on a consolidated basis is unlikely to be material given the company's well-diversified operational geographies. During the period, close to 70% of AMX's consolidated revenues were generated outside of Mexico.

Fitch does not foresee AMX's operational asset sale in Mexico in the short term given the ongoing change in the competitive dynamics driven by a new entrant as well as the company's tower assets spin-off, which could help improve the competitive balance in the industry. Any immediate asset divestiture by AMX to reduce its market shares may not be necessary in the absence of any further unfavorable regulatory measures.

Stable Revenue Growth; Pressured Profitability

AMX should be able to maintain a slow but stable revenue growth trend over the medium term backed by the growth in its subscriber base and data revenues despite the increasing pricing pressures on voice services and negative exchange rate movements in some of its key markets. The company has aggressively invested since 2011 in upgrading its fixed/mobile networks across the region to provide attractive bundled fixed product offerings, as well as to improve mobile data user base and revenues. As a result, the revenue contributions from fixed-line services, excluding voice, and wireless data represented 23% and 31% of the consolidated revenues, respectively, during 2Q'15, which are significant improvements from 20% and 21%, respectively, in 2012. As these segments fully offset the declining voice revenues, AMX has managed to improve its revenues by 2% during 1H'15 compared to the same period a year ago.

Negatively, the company's EBITDA declined by 4% during the period compared to a year ago, pro forma of Telekom Austria consolidation, mainly due to the negative reform impact in Mexico. As intense competition across AMX's operational geographies is unlikely to be curbed, ongoing margin erosion could continue over the medium term. AMX's consolidated EBITDA margin deteriorated to 31% during 1H15, which compares to 32% in 2014.

Robust Cash Flow Generation:

AMX's solid positive FCF generation is highly likely to continue over the medium term, underpinned by stable cash flow from operation (CFFO), fully covering its capex requirement and shareholder returns. The company's capex budget is likely to be gradually tapered following its aggressive investments since 2011 as major investments for fiber optic deployment are largely completed. As a result, AMX's capex to sales ratio is forecast to decline to below 15% over the medium term from 17% in 2014. Fitch forecasts the company's FCF margin, post dividends, to remain at around 5% over the medium term.

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Tags: america movil  Mexico