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Moody's: Telekom Malaysia's 1H 2015 results support its debt rating

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Moody's Investors Service says that Telekom Malaysia's results for the six months to June 2015 (1H 2015) support the company's A3 issuer and senior unsecured ratings and positive outlook.

TMB recorded revenue growth of 3.2% for 1H 2015, driven by internet revenue up 14.3% year-on-year. This solid growth in internet segment was mainly due to higher UnifFi customer base up 16.2% year-on-year, as well as the consolidation of broadband revenue from Packet One ("P1") acquired on 30 September 2014. Internet accounted for 30% of revenues in 1H 2015.

"Growing internet revenues continued to offset a 2.1% fall in revenue from fixed-line voice. Revenue contribution from the fixed-line voice segment will continue to decline from 31% in 1H 2015," says Gloria Tsuen, a Moody's Vice President and Senior Analyst, and Lead Analyst for TMB.

Adjusted EBITDA margins decreased by around 0.7% to 38.1% in for last twelve months to June 2015 compared to December 2014, notably due to operational loss of P1 which has been consolidated since October 2014.

Moody's expects TMB to maintain low single-digit earnings growth over the next two years, supported by continued growth in broadband revenues. Margin improvements are unlikely, however, given competitive pressure, and the consolidation of P1 which has lower EBITDA margins than TMB.

TMB's leverage -- as measured by adjusted debt to EBITDA -- was around 1.9x at the end of June 2015, slightly above the 1.8x at the end of 2014, largely driven by the issuance of RM300 million Islamic notes in June 2015.

"We expect TMB's leverage to rise again over the next two years, however, given high capex, high shareholder returns, and continued margin pressure, although leverage will remain within our expectations for the rating level at 2.0-2.5x," adds Tsuen.

Adjusted free cash flow decreased to around RM36 million for last twelve months to June 2015, compared to RM85 million as of December 2014, due to increasing capex. Capex will likely remain elevated in the next few years largely on account of new HSBB2 (High Speed BroadBand phase 2) and the Sub Urban Broadband (SUBB) projects announced earlier this year, which will see investment of up to RM3.4 billion over the next 10 years. However, a portion of the said projects' overall cost will be shared with the Malaysian government. The definitive terms and the co-investment by the government will only be made known upon conclusion of the agreement for the projects.

As of June 2015, TMB had US dollars denominated borrowings of $400 million. Of this amount, $200 million (RM755 million) is hedged through cross currency interest rate swap transactions. This results in approximately 12% of the company's total debt, or RM755 million denominated in US dollars after hedging. The unhedged amount of $200 million primarily relates to the $300 million bond due in August 2025.

TMB's A3 rating is in line with its baseline credit assessment (BCA) of a3 and is based on its fundamental creditworthiness. TMB's rating outlook is positive, in line with the sovereign rating of Malaysia.

Upward rating action at the sovereign level could result in positive rating action for TMB, unless there is a major adverse change in its fundamental credit profile and relationship with the government. Upward rating pressure could also emerge from an improvement in free cash flow, resulting in adjusted FCF/debt consistently above 15-20%, and adjusted debt/EBITDA consistently below 2.0x.

Negative rating pressure is unlikely, given the positive outlook. However, the outlook could revert to stable if the outlook of the sovereign rating changes to stable, or if there is a major change in the company's relationship with the government.

In addition, the change in the outlook to stable could be considered if TMB's fundamental credit profile weakens due to the erosion of its dominant market positions, significant declines in its telecommunications revenue, or a significant increase or acceleration of its investment in the HSBB project. Such risks would be measured by adjusted retained cash flow (RCF)/debt falling below 25-30%, or adjusted debt/EBITDA remaining above 2.5x on a consistent basis.

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