Fitch Affirms Telkomsel at 'AAA(idn)'; Outlook Stable
The affirmation is based on our expectation that Telkomsel will maintain its market lead over its closest competitors and a strong financial profile. We estimate the company's financial metrics will remain robust with positive free cash flow and net debt/EBITDA below 1.0x
'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country
KEY RATING DRIVERS
Market Leadership to Continue: Fitch believes Telkomsel will to continue be the largest mobile operator in Indonesia by subscribers as there is a big gap between the company and its closest competitors. Telkomsel has more than 152 million subscribers at end-2015, compared with PT Indosat Tbk's (Indosat, BBB/Stable/AAA(idn)) more than 69 million, PT Hutchison 3 Indonesia's around 55 million and PT XL Axiata Tbk's (XL, BBB/Stable/AAA(idn)) more than 41 million.
More Subscribers, Greater Investment: Fitch believes that Telkomsel will continue to outperform its competitors in terms of net subscriber additions and network investment. The company added 12 million new subscribers in 2015 (2014: 9 million) while its three closest competitors added less than 7 million each. Telkomsel plans to invest IDR13trn in capex in 2016 of which 80% will be used for network rollout - while XL and Indosat will spend less than IDR8trn each. Telkomsel has more than 103,000 base transceiver stations (BTS) with more than 54,000 3G/4G BTS, which puts it far ahead of Indosat and XL with fewer than 56,000 each, of which fewer than 32,000 are 3G/4G.
Solid Growth, Minimal Margin Erosion: Fitch expects Telkomsel's revenue to increase in the high-single digits annually in 2016-2017, driven by solid growth in data revenue (43% in 2015). This will be supported by higher adoption of 3G/4G compatible devices, increased data bundling and growth in data usage. EBITDA margin will gradually decline, as less profitable data services replace traditional voice and short messaging services. We nonetheless estimate that EBITDA margin will remain healthy at 54%-55% during 2016-2017.
Robust Financial Profile: Telkomsel's cash flow generation is likely to remain solid. Fitch expects Telkomsel to continue generating positive free cash flow while spending 17%-18% of revenue as capex and distributing 80% of its net income as dividends. Leverage will remain low with net debt/EBITDA below 1.0x until 2018.
Data-Driven Growth: Fitch believes data service will be the main driver for the mobile industry as the increasing smartphone penetration will lead to the migration of customers to 3G/4G services. We also expect price discipline to continue amid a more benign competitive environment in 2016. Telcos are likely to focus on offering larger data bundles rather than competing on price. Industry consolidation and smaller telcos' emphasis on improving profitability have helped to stabilise data tariffs.
Fitch's key assumptions within the rating case for Telkomsel include:
- High single-digit revenue growth annually in 2016-2018
- Gradual narrowing of EBITDA margin as less-profitable data services replace voice and text services
- Capex/revenue of 17%-18%
- Dividend payout ratio of 80%
No positive rating action is possible as the company is already at the highest level on the National Rating scale.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A significant increase in shareholder return or a major debt-funded acquisition could lead to a negative rating action. However, this is unlikely in the short to medium term given the large ratings headroom.