OREANDA-NEWS. Fitch Ratings Indonesia has assigned PT Finnet Indonesia (Finnet) a National Long-Term Rating of 'A(idn)' with Stable Outlook.

Finnet provides payment services for PT Telekomunikasi Indonesia (Telkom; BBB-/ Stable) and PT Telekomunikasi Seluler Tbk (Telkomsel; AAA(idn)/ Stable). Finnet is indirectly owned by Telkom (60%) and Bank Indonesia's pension fund (40%).

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Captive Business from Telkom: Finnet's rating reflects linkage to the Telkom group, with about 80% of its cash flows derived from business with its 60% shareholders, Telkom and its affiliate Telkomsel. Fitch expects the linkage will remain strong over the medium term because of Telkom's strategy to retain the payment service provider within the group. Finnet also benefits from Telkomsel's strong market position in the Indonesian mobile telecommunications market (45% share by number of subscribers) and the high growth potential for telecommunications services stemming from the country's youthful population and growing middle-income segment.

Linkage Warrants Uplift: Fitch provides Finnet with a one-notch uplift from its standalone rating of 'A-(idn)' in view of evidence of financial support from Telkom. Both shareholders provided loans in 2008 and demonstrated a willingness to continue supporting the company's funding requirements as necessary.

Strong Balance Sheet: Fitch expects Finnet to move into a net debt position in 2015 from a historically net cash position, as the company plans to borrow to fund higher working capital requirements. Fitch, however, believes Finnet will be able to deleverage quickly, regain a net cash position in 2016 and maintain a low leverage profile with funds flow from operations (FFO)-adjusted leverage of less than 1x. This is supported by highly predictable cash flows from Telkomsel's prepaid voucher business and limited capex requirements.

High Growth, Capital Intensive: Fitch expects Finnet to double its revenue this year as it starts its role as payment aggregator for Telkomsel's prepaid voucher sales through "modern" or non-traditional channels. Although this will significantly increase Finnet's working capital requirements, the risk is mitigated by the planned fundraising and Telkomsel's solid market position in the Indonesian mobile industry.

Constrained by Small Scale: Finnet's rating is constrained by its small operating scale, and limited strategic importance to Telkom. Finnet's contribution to Telkom's sales is still small, at around 10% or less. Fitch does not expect Finnet's contribution to Telkom's sales to increase significantly over the medium term, given the high proportion of payments made through traditional channels in Indonesia.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Finnet will start a role as Telkomsel's prepaid bank channel aggregator after 1H15
- The number of transactions from Telkomsel will increase by about 20% in 2015
- Consolidated EBITDA margins will be squeezed to about 7% in 2015 from 18% in 2014 due to higher earnings contribution from Telkomsel's prepaid vouchers sales
- Moderate capex of IDR50bn60bn annually

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- weakening linkage to Telkom
- FFO-adjusted leverage remains above 1x after 2016 (2014: net cash).

Positive: Future developments that may, individually or collectively, lead to positive rating action include
- stronger linkage to Telkom evidenced by, for example, sales contribution increasing to above 20% (current: around 10%).