Fitch Affirms Indonesia's Telkom at 'BBB-'; Outlook Stable
Published on: 5th Aug 2014
Fitch Ratings has affirmed Indonesia's Telkom Long Term Foreign and Local Currency debt ratings, as well as its foreign currency senior unsecured rating at 'BBB '. The Outlooks on the IDRs are Stable.
Constrained by Sovereign Rating: Telkom's IDRs are capped by the ratings on the Indonesian sovereign, due to the government's 52.6% shareholding in Telkom. The government, through its control of the company's board of directors, has significant influence over the company. Telkom is strategically important to the government as the country's incumbent telecommunications company and dominant wireless and broadband operator.
Reduced Ratings Headroom
Telkom's large ratings headroom is likely to shrink. Fitch forecasts that 2014 FFO of IDR30trn-32trn will be just sufficient to fund capex and dividends, leaving little free cash flow. 2014 capex will rise to IDR24trn or 27% of its revenue (2013: IDR21trn) as it expands 3G coverage and adds over 1,600 base transceiver stations (BTSs) each month. During 1H14, Telkom invested IDR12trn mainly to add 9,696 BTSs, out of which about 75% were 3G BTSs.
Fitch believes that Telkom's 2014-15 dividends could increase to IDR9trn-10trn a year (2013: IDR8.4trn), based on its policy to distribute at least 65% of its previous year's net income. Telkom's 2013 net income rose 11% to IDR14.2trn. A strong balance sheet and lack of a large acquisition targets and other investment opportunities could also lead the government to push for larger dividends.
Decline in Profitability
Fitch expects Telkom's operating EBITDAR margin to deteriorate by 150bp-200bp annually due to greater competition and a changing revenue mix. Data tariffs could fall as smaller loss-making telcos, unable to gain any meaningful market share, are likely to compete aggressively on price.
Also, an increased revenue contribution from the lower-margin data segment will also affect profitability. The voice market has matured and voice penetration is now more than 100%. The Indonesian market is experiencing early signs of data cannibalisation in which subscribers switch to data-enabled text and voice applications.
Telkom's plan to monetise its tower assets either through a public equity offering or through a sale to a strategic partner could further strengthen its balance sheet. Telkom's 100% subsidiary PT Dayamitra Telekomunikasi is in the process of consolidating a majority of tower assets owned by Telkom and Telkom's GSM subsidiary, PT Telekomunikasi Selular (AAA(idn)/Stable).
Fitch believes that the Indonesian telecom industry will consolidate over the next 12 to 24 months. A consolidation among CDMA operators would reduce the industry overcapacity and the number of telcos to four-five from the existing seven. Smaller operators, especially those operating under CDMA technology, are struggling to grow profitably and have limited financial flexibility to fund capex.