Fitch Affirms Globe Telecom's 'BBB-'; Outlook Stable
A full list of rating actions is at the end of this Rating Action Commentary.
KEY RATING DRIVERS
Strengthening Foothold: Globe's ratings continue to benefit from its number two position in the Philippines telecom market. Its share of industry mobile revenue rose to 43% from 37% over 2011-2014, after it increased handset subsidies and penetrated rural areas. Globe competes with market leader Philippine Long Distance Telephone Company (PLDT; BBB/Stable) in all three segments: wireless, fixed-line and broadband.
New Competition: We expect the potential entry of Telstra Corporation Limited (A/Stable) with San Miguel Corporation to have limited impact on domestic competition in the next two years. Large cash burn is likely for the new entrant in the initial period, as it will face significant capital outlay to build its network in the absence of mandatory infrastructure sharing. However, we believe the impact on industry profitability may be greater over the longer term.
Steady Leverage: The Stable Outlook reflects our expectations that Globe's funds flow from operations (FFO)-adjusted net leverage will remain around 2.2x-2.5x in 2015-2017 (2012-2014: 2.0x-2.5x). 3G/4G network expansion will increase the company's capex in 2015 to USD850m (PHP39bn), inclusive of the USD200m brought forward from 2014. However, we expect capex to decline to around USD700m-750m in 2016-2017.
Margin Dilution: Our forecast assumes continued pressure on operating EBITDAR margin, which will bring it to 44% in 2015 (2014: 45.2%), as cost management and revenue growth will only partially offset the dilutive effect of a changing revenue mix. We see revenue growing at mid-single-digit percentages in 2015 (2014: 8.5%); which is higher than our forecast of flat revenue for PLDT. We believe Globe's larger proportion of post-paid and smartphone users should translate into stronger data monetisation and gains in market share.
Continued FCF Deficit: Globe's free cash flow (FCF) is likely to stay negative in 2015-2016, as cash generation (PHP38bn) will fall short of its capex (PHP39bn) and dividends (PHP11bn). Our forecast assumes a dividend payout of 85%, in line with historical trends and the company's stated policy of 75%-90%.
Solid Liquidity: Globe's cash balance of PHP18.2bn at end-June 2015 should comfortably cover its debt maturities of PHP4.0bn in 2015 and PHP7.7bn in 2016. Liquidity is also supported by its access to local banks and the retail bond market given its solid financial and market position. Globe's overall debt is mostly denominated in Philippine pesos, while US dollar term loans accounted for 20% of its PHP70.3bn debt
Fitch's key assumptions within the rating case for the issuer include:
- Revenue to grow by mid-single-digits in 2015-2017;
- Operating EBITDAR margin of around 43%-44% in 2015-2017;
- Annual capex of USD850m in 2015, and to decline to USD700m-750m in 2016-2017;
- Dividend payment of 85% of net income.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Any debt-funded acquisitions or a sharp deterioration in the company's operating profile leading to FFO-adjusted net leverage rising over 3.5x on a sustained basis (from 3.0x previously) (2014: 2.0x)
Positive: Although unlikely in the next 12-24 months given higher leverage, future developments that may, individually or collectively, lead to positive rating action include:
- Easing competitive environment leading to FFO-adjusted net leverage declining to below 2.0x (from 1.5x previously) on a sustained basis.
The revisions in the leverage guidelines reflect our view that the business risk differential between Globe and PLDT has narrowed, following progress made by Globe in recent years.
FULL LIST OF RATING ACTIONS
Globe Telecom, Inc.
Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Stable
Foreign-currency senior unsecured rating affirmed at 'BBB-'
Long-Term National Rating affirmed at 'AAA(phl)'; Outlook Stable.