OREANDA-NEWS. Fitch Ratings Indonesia has affirmed PT Finnet Indonesia's (Finnet) National Long-Term Rating at 'A(idn)' with a Stable Outlook. At the same time, the agency has also affirmed Finnet's IDR200bn medium-term notes at 'A(idn)'.

The affirmation reflects significant improvement in Finnet's operational scale, conservative credit metrics, and minimal expansion and funding risks. The rating is still constrained by the company's small operational scale with an EBITDA that is lower than other peers on the National rating scale. Finnet is indirectly 60%-owned by PT Telekomunikasi Indonesia Tbk (Telkom, BBB-/Stable) and indirectly 40%-owned by Bank Indonesia's pension fund.

'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
Payment Aggregator Business Drives Scale: Fitch expects Finnet's revenue and EBITDA to rise in 2016 because the period will include a full 12 months of revenue from its payment aggregator business. Finnet's expansion into the payment aggregator business started in October 2015, and has already resulted in significant increase in the company's scale. We expect 2016 revenue to rise by more than 140% (2015: 414%) and EBITDA to grow by more than 80% (2015: 30%).

However, the company's operational scale remains small - with EBITDA likely to remain below USD30m until 2019 - compared with higher-rated peers on the national scale.

Cash Flow Stability: Finnet will derive more than 95% of its revenue from transaction fees from PT Telekomunikasi Selular's (Telkomsel, AAA(idn)/Stable) pre-paid vouchers. Finnet's cash flow is stable given Telkomsel's dominant position in the mobile telecommunications market and the dominance of pre-paid services in Indonesia. Telkomsel, which is 65%-owned by Telkom, is the leading mobile operator in Indonesia in terms of subscribers. It had more than 148 million subscribers at end-September 2015, more than the combined subscribers of its closest competitors, PT XL Axiata Tbk (BBB/Stable) and PT Indosat Tbk (BBB/Stable).

Parental Support: Finnet's rating continues to benefit from a one-notch uplift that stems from Telkom's indirect 60% ownership. Evidence of parental support includes the provision of tangible financial support to Finnet, including funding to meet its increasing working-capital needs for its payment aggregator business. In 2015, the company received IDR250bn in a stand-by shareholder loan from its direct shareholder, PT Multimedia Nusantara (Metra), which is wholly owned by Telkom. In addition, IDR200bn of Finnet's medium-term notes were fully subscribed by Telkom's pension fund.

Conservative Metrics, Adequate Liquidity: Fitch expects Finnet's credit profile to remain conservative despite additional indebtedness for working capital. FFO-adjusted leverage is likely to remain below 1.0x in 2016-2018 with solid FFO-interest coverage of above 5.0x. Finnet will generate cash flow from operations of more than IDR200bn, which is adequate to cover around IDR50bn-100bn in capex, IDR43bn debt amortisation and around IDR40bn-70bn of dividend payment.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Finnet include:
- Tariffs and transaction fees will remain stable in 2016-2019
- Telkomsel's payment aggregator transactions to grow by 10% per annum in 2016-2019
- Capex of IDR50bn-100bn in 2016-2019
- Dividend payout ratio of 70%

RATING SENSITIVITIES
Positive: Developments that may, individually or collectively, lead to positive rating action include
- stronger linkage with Telkom, which may take the form of stronger operational ties between the two companies
- further improvement in scale with EBITDA rising above USD50m (2015: USD10m) while maintaining FFO-adjusted leverage below 1.5x

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- weaker linkage with Telkom
- FFO-adjusted leverage above 2x on a sustained basis.