Fitch Ratings has changed South Korea-based LG Telecom's (LGT) Outlook to Positive from Stable. The company's Long-term foreign currency Issuer Default rating (IDR) has been affirmed at 'BB+'.
The change in the Outlook is mainly based on LGT's strengthened market position and improved credit profile during the past two financial years. LGT successfully increased both its subscriber and revenue-based market shares during this period, notwithstanding the removal of market share focused regulations favoring LGT and aggressive competition with larger operators involving sizeable subsidies on handset prices.
Its consolidated debt in FY07 decreased to KRW841bn from KRW1,281bn in FY05, thanks to consistently positive free cash flow (FCF) generation of KRW214bn in FY07 and KRW179bn in FY06. Consequently, LGT's total adjusted net debt/operating EBITDAR leverage fell to 1.2x in FY07 from 1.7x in FY05 and its funds from operations fixed charge coverage more than doubled to 13.3x from 6.6x.
"Fitch's outlook horizon is 1-2 years. For LGT the first point at which a rating upgrade may occur is if LGT's H2 2008 and 1Q 2009 results reveal margin stability on the back of lower marketing costs compared with H1 2008, its revenue market share remains stable, as well as consistent positive FCF generation with the company's net adjusted Debt/ Operating EBITDAR leverage ratio sustained below 1.5x," said Jongwan Kim, associate director in Fitch's Asia Pacific Telecom, Media and Technology team. "An upgrade might also occur within the 1-2 year horizon if it does not occur in the first half of 2009."
The agency cites weaker profitability and expected capex increase as concerns that prevented a rating upgrade at this juncture. In FY07 and H108, LGT's operating profitability deteriorated primarily because of intensified marketing activities by the three Korean mobile operators as the government's ban on handset subsidies was progressively removed. In addition to increased marketing costs, roll-out cost for the company's new CDMA EVDO Revision A network is expected to result in a total spending of KRW700bn in FY08, compared to W622bn and W451bn in FY07 and FY06, respectively. Consequently, Fitch expects LGT's FCF generation to trend down in FY08.
Nevertheless, Fitch is optimistic that LGT's operating profitability and FCF generation should recover from H208. It notes that H108's industry-wide record level of marketing expenses is unlikely to continue. With the introduction of an obligatory subscription period of up to two years in April 2008 for its subsidised handset price offers, churn rates and marketing expenses should fall.
"In addition, as no operator was able to claim higher market share during H108, it is reasonable to expect that operators will now take a more rational approach to their marketing expenses," Mr Kim added "Since LGT's 3.5G CDMA EVDO revision A network roll-out has largely been completed this year, capex is likely to fall and FCF should recover from FY09 onwards."
Incorporated in July 1996 with commercial operations commencing in October 1997, LGT is the smallest of three mobile telecom operators in South Korea. Its largest shareholder is LG Corp, with a 37.4% stake. LGT's subscriber-based market share at end-August 2008 was 18%.
Posted to the site on 1st October 2008
Posted to: www.cellular-news.com/story/33916.php