Fitch Ratings has today affirmed Telekomunikasi Indonesia's (Telkom) foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' with Stable Outlook. At the same time the agency has affirmed Telkom's senior unsecured rating at 'BB+'.
Telkom's ratings reflect its diversified operations and entrenched position in the Indonesian telecom sector, with leading market shares in cellular, fixed-line and data services. Its consolidated profile is heavily influenced by its GSM cellular business, through its 65% subsidiary Telekomunikasi Selular (Telkomsel), which accounted for around 61% of the group's total revenue and 75% of EBITDA in 2009.
Fitch notes that the growth in Telkom's voice revenue in fixed line (wireline and wireless) and GSM cellular was curtailed by the voice tariff war in Indonesia in 2008. The company's fixed-line telephone segment registered negative revenue growth of 11.2% in 2009, and declined by a further 6.7% in Q110. Cellular telephone revenue growth (excluding data/SMS and internet revenue) was only 7.4% in 2009 and 2.9% in Q110. Accordingly, the management is transforming its business strategy by expanding into other related industries such as information, media and edutainment. As a result, the company's key revenue growth has been shifting toward internet broadband and data services. These recorded stronger revenue growth of about 25% yoy in 2009 and Q110, increasing the revenue contribution from these sectors to 30.1% in Q110 from 24.2% in 2008.
Underpinned by its high cash flow from operations averaging IDR27.3trn annually during 2007-2009, Telkom has been able to maintain its exceptionally strong credit metrics, with funds from operations (FFO) net adjusted leverage at 0.9x and FFO net interest coverage at 21.9x in FY09. During 2007-2009, Telkom spent about IDR17.4trn on capex annually; however, it remained pre-dividend free cash flow (FCF) positive, and marginally FCF negative post-dividend in 2008-2009, primarily due to the higher dividend pay-out ratio. Although the company's capex programme will remain high at about IDR20trn in 2010 to support its business transformation, Fitch Ratings expects the company's leverage and interest coverage to remain strong for its rating category.
At end-March 2010, the company held cash reserves of IDR6.8trn against maturities of IDR7.8trn and capital commitments of IDR7.9trn in 2010. However, Fitch believes that Telkom's short-term liquidity remains solid as it continues to generate strong positive pre-dividend FCF and has strong access to bank and capital market funding.
The Stable Outlook reflects the Outlook on the Indonesian sovereign ratings.
Telkom's foreign- and local currency IDRs are effectively capped by the respective IDRs on the sovereign, given Indonesian government's majority holding in the company (52.47% at end-March 2010) and the significant influence it exerts on the company's business and financial matters, and management control. Any upgrade or downgrade of the sovereign ratings would result in a similar change in Telkom's ratings. Positive rating factors would include a reduction of the government's stake to below 50%, including a waiver of rights associated with the Series A share. Conversely, any evidence of political interference leading to actions detrimental to the interests of creditors, such as a significant increase in dividend payout, and/or any significant debt-funded acquisition, would be negative for its ratings.
The proposed consolidation of Telkom's CDMA business with Bakrie Telecom's is unlikely to impact Telkom's ratings given the capping of its current ratings by Indonesia' sovereign ratings.
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