Fitch Affirms Telefonica Moviles Chile at 'BBB+'; Outlook Stable
KEY RATING DRIVERS
TMCH's ratings reflect its leading market position in the Chilean mobile telecommunications market, strong brand recognition and network infrastructure, and sound financial profile backed by solid cash flow generation. The ratings also incorporate its linkage to the parent, Telefonica S. A. (TEF) rated 'BBB', and TEF's other Chilean subsidiary, Telefonica Chile S. A. (TCH), also rated 'BBB+'. TCH offers complementary fixed-line telecommunication services and allows TMCH to achieve synergies mainly in terms of integrated business strategy under the common management, brand unity, as well as sales coverage under the common management strategy. The ratings are tempered by the intense competitive landscape amid the industry maturity, and the company's shareholder distribution policy.
Strong Market Position:
TMCH is one of the two dominant mobile operators in Chile, along with Empresa Nacional de Telecomunicationes S. A. (ENTEL), with a 34.3% subscriber market share as of March 2016, estimated by Subsecretaria de Telecomunicaciones (Subtel). Its high capex to bolster network competitiveness bodes well for its growth strategy centered on mobile data, which still has ample room for growth given only 33% of mobile internet penetration of its subscriber base. The company is also estimated to have the largest mobile internet market share of 34%,
The competitive landscape in Chile will remain intense, as other major mobile operators, including the new entrant, WOM, continue to offer aggressive tariff plans to improve market shares. While this would suppress the company's subscriber base growth, especially in the prepaid segment, and profitability, Fitch expects TMCH's market position to remain intact as its solid network competitiveness and service quality, and strong brand recognition will help fend off competition.
Mobile Internet Drives Growth:
Growth in mobile internet and data services should help offset negative impact from ongoing contraction in voice service revenues over the medium term, caused by a high level of competition and the falling subscriber base - mainly the prepaid segment. While the continued loss in prepaid mobile internet user base is negative, with a 32% fall at end-June 2016 compared to a year ago, a solid 15% growth in high-ARPU post-paid data users helped achieve 2.5% mobile internet revenue growth during the same period. TMCH's mobile internet revenues proportion of total sales improved to 37% at end-June 2016 from just 11% in 2012.
Fitch believes that ever-increasing demand for data will continue in Chile over the medium to long term, in line with the global trend. As such, Fitch expects this trend to continue with the data users representing around 45% by end-2018 and the segmental revenue proportion increasing above 45% during the same period, mitigating ongoing voice revenue contraction.
Voice ARPU Erosion:
Revenue contraction in the voice segment is unlikely to be curbed over the medium term as the average revenue per user (ARPU) continues to trend down against the backdrop of high competition and industry maturity, with the high mobile service penetration rates at 127% as of March 2016. Fitch forecasts the erosion in voice revenues will remain steeper than the mobile internet revenues growth at least for the short term, suppressing the company's top line growth in negative territory until 2017. During the first half of 2016, TMCH's revenues fell by almost 5% compared to a year ago. Positively, its EBITDA generation remained relatively stable, only falling by 1% as a result of its cost control efforts, including lower subsidies.
Robust Cash Flow Generation:
TMCH boasts strong and stable cash flow generation which helps the company maintain its solid financial profile in line with the rating level. The company's pre-dividend FCF margin is high, with an average of 9% during 2011-2015, and Fitch expects a similar level of margin to continue over the medium term. Fitch forecasts the company's CFFO generation to consistently be over CLP200 billion annually over the medium term, which should comfortably cover the company's capex needs of around CLP120 billion per year on average during 2016-2018. This provides the company with comfortable headroom to support its shareholder returns, which Fitch expects to be largely covered by its pre-dividend FCF generation.
Stable Financial Profile:
TMCH's financial profile is forecast to remain commensurate with the rating level over the medium term backed by solid cash flow generation. Fitch forecasts the company's net leverage, measured in terms of total adjusted net debt-to-EBITDAR, to remain stable at around 1.2x-1.3x in the short - to medium-term in the absence of any sizable dividends, which is considered moderately low for the rating category. During the latest 12 months (LTM) as of June 30, 2016, TMCH's net leverage was 1.1x, reflecting its net value of hedge derivative instruments, which was in line with the end-2015 level.
Fitch's key assumptions within the rating case for TMCH include
--Negative revenue growth in 2016 and 2017;
--EBITDAR margin to remain stable at around 26%-27% over the medium term;
--Capital intensity, measured by capex to sales, to gradually fall toward 12% by 2018;
--Pre-dividend FCF margin to remain stable at around to 10% over the medium term;
--Net leverage to remain modestly above 1.0x over the medium term.
Negative rating action could be considered in case of material deterioration in the company's key operating and financial metrics due to intense competition, unfavorable regulatory impact, and higher than expected capex and shareholder distributions - all of which combined resulting in negative FCF generation and net leverage increasing to over 2.0x on a sustained basis.
Telefonica Moviles Chile S. A.'s ratings are not directly linked to the ratings of its parent, Telefonica SA (TEF). However, any significant deterioration in the parent's credit profile, to the effect that it results in further rating downgrades or in a material liquidity crunch for the parent, could place pressure on Telefonica Moviles Chile S. A.'s ratings. TEF is currently rated 'BBB'/Outlook Stable.
Conversely, an upgrade of Telefonica Moviles Chile S. A.'s ratings, resulting in more than one notch differential from the parent's 'BBB' rating, would be limited given their strong linkages.
TMCH boasts a sound liquidity profile backed by its large readily available cash position amid robust CFFO generation. As of June 30, 2016, the company's short-term debt amounted to CLP169 billion, which was fully covered by its cash balance of CLP223 billion. The company has good access to capital markets, which further bolsters its financial flexibility and liquidity profile.
Full List of Rating Actions
Fitch affirms TMCH's ratings as follows:
--Long-Term Foreign and Local Currency Issuer Default Rating (IDR) at 'BBB+';
--National long-term rating at 'AA(cl)';
--Local debt issuance programme series No. 589, No. 590, No. 813, and No.814 and series C, D, F, G, H, I, J, K, L, and M bond issuances at 'AA(cl)'.