Following Telekom Malaysia's (TM) announcement of the final terms of its restructuring, Fitch Ratings has reiterated its initial view that the company's Long-term Issuer Default Rating and instrument ratings would be unlikely to change as a consequence of the demerger. However the agency notes that greater clarity is required on several issues, including final terms of TM's public-private partnership with the Malaysian Government for its high speed broadband (HSBB) project - before a final rating decision can be taken. Any material divergence from the information currently available to the agency could result in a negative rating action or a change in the Outlook, although such a scenario is not anticipated.
TM's demerger is on track for completion by early Q208, following which the agency's ratings will relate to the demerged entity 'FixedCo', which will be TM's successor company. FixedCo will own and operate TM's legacy fixed-line franchise, its emergent consumer broadband services and non-telecom-related businesses, while the domestic cellular (Celcom) and overseas businesses will vest with a new company under the ownership of TM International (RegionCo). Fitch understands that all cross-acquisitions related to the demerger will be transacted at cost, and that together with settlement of inter-company balances, the RM7.8 billion due from RegionCo to FixedCo will be satisfied through debt replacement of RM2.9bn, short-term payables of RM1.1bn and issuance of RM3.8bn of RegionCo shares.
FixedCo has an entrenched position in the Malaysian telecommunications sector, with a 95% share of local-access lines and a 96% share of broadband subscribers at end September 2007. Traditional voice services are currently the principal contributor to the company's earnings and cash flow, notwithstanding declines in recent years on account of mobile and IP-based substitution. The company is expected to register low earnings growth, with continued declines in fixed-voice counterbalanced by growth in fixed-data across both the enterprise and retail segments. Its financial profile is expected to remain conservative, with company guidance on proforma net leverage of 0.3x at FYE-December 2006.
FixedCo is well positioned to gain a major share of future broadband growth, which is expected to be robust given that household penetration was quite low at 13% by H107. However, this business will entail substantial capex outlays over the medium term, as the company continues to expand its ADSL platform and simultaneously roll out HSBB over optical fibre. The latter is to be undertaken in collaboration with the Malaysian Government, which will subsidise around 30% of the total project cost of RM15.2bn over a 10 year period. The company expects to finalise the public-private partnership (PPP) terms by Q108, and thereafter to undertake a limited commercial launch within six months from the date of signing of the PPP. As most of the government grant is expected to be provided between FY08 and FY10, the company expects that net capex outlays on HSBB will be relatively light during this first phase of expansion.
The existing rating level can accommodate more generous shareholder policies for the demerged entity FixedCo (compared to its predecessor), by virtue of its stronger pre-dividend free cash flow profile. The company has indicated an ordinary dividend payout of up to 90% of normalised profit after tax, subject to a minimum of RM700 million. In addition, it plans to return excess cash derived from a commercial sale and leaseback transaction and from Celcom's capital repayment to shareholders, through a special dividend of RM1.6bn
Fitch expects that TM will maintain its leading position in traditional fixed-line and remain the largest beneficiary of broadband growth, supported by broadly favorable regulatory policies. However, downward rating pressure could arise in the event of capital management initiatives or significant debt-funded capital expenditure that results in net adjusted leverage (defined as total adjusted debt net of cash by operating EBITDAR) exceeding 1.7x.
Posted to the site on 18th December 2007
Posted to: www.cellular-news.com/story/28140.php