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Fitch Affirms Globe Telecom's 'BBB-'; Outlook Stable

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Fitch Ratings has affirmed Philippines based Globe Telecom's Long Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB '. The agency has also affirmed the senior unsecured and National Long Term Rating at 'BBB ' and 'AAA(phl)' respectively. The Outlook on the issuer ratings is Stable.

Strengthening Foothold

­Globe's ratings continue to benefit from its number two position in the Philippines telecom market. Its share of industry mobile revenue rose to 43% from 37% over 2011-2014, after it increased handset subsidies and penetrated rural areas. Globe competes with market leader Philippine Long Distance Telephone Company (PLDT) in all three segments: wireless, fixed-line and broadband.

New Competition

Fitch expects the potential entry of Telstra with San Miguel to have limited impact on domestic competition in the next two years. Large cash burn is likely for the new entrant in the initial period, as it will face significant capital outlay to build its network in the absence of mandatory infrastructure sharing. However, they believe the impact on industry profitability may be greater over the longer term.

Steady Leverage

The Stable Outlook reflects expectations that Globe's funds flow from operations (FFO)-adjusted net leverage will remain around 2.2x-2.5x in 2015-2017 (2012-2014: 2.0x-2.5x). 3G/4G network expansion will increase the company's capex in 2015 to USD850m (PHP39bn), inclusive of the USD200m brought forward from 2014. However, Fitch expects capex to decline to around USD700m-750m in 2016-2017.

Margin Dilution

Fitch's forecast assumes continued pressure on operating EBITDAR margin, which will bring it to 44% in 2015 (2014: 45.2%), as cost management and revenue growth will only partially offset the dilutive effect of a changing revenue mix. They see revenue growing at mid-single-digit percentages in 2015 (2014: 8.5%); which is higher than our forecast of flat revenue for PLDT. They believe Globe's larger proportion of post-paid and smartphone users should translate into stronger data monetisation and gains in market share.

Continued FCF Deficit

Globe's free cash flow (FCF) is likely to stay negative in 2015-2016, as cash generation (PHP38bn) will fall short of its capex (PHP39bn) and dividends (PHP11bn). Fitch's forecast assumes a dividend payout of 85%, in line with historical trends and the company's stated policy of 75%-90%.

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