Fitch Affirms Telekom Malaysia at 'A-'; Outlook Stable

Fitch Ratings has affirmed Telekom Malaysia Berhad's (TM) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. The agency has simultaneously affirmed TM's Foreign-Currency senior unsecured rating at 'A-'.

KEY RATING DRIVERS

Limited Rating Headroom: Fitch expects TM's funds flow from operations (FFO)-adjusted net leverage for 2016-2017 to remain high at around 2.2x (2015: 2.3x). This is due to the rollout of high-speed broadband (HSBB2), sub-urban broadband (SUBB) and long-term evolution (LTE) networks. The Stable Outlook reflects our expectation that TM will deleverage to 1.8x-2.0x in 2018-2019. We would be likely to consider negative rating action should deleveraging be delayed.

Higher Capex: TM's expansion in fibre infrastructure and LTE is likely to increase gross capex to MYR3.3bn-3.6bn in 2016 and 2017 (2015: MYR2.5bn). We think the MYR3.4bn 10-year HSBB2 and SUBB investment will be front-loaded in the initial years, although the receipt of a MYR1.1bn government grant should ease some of the capex burden.

The mobile network-sharing arrangement with Celcom would also facilitate nationwide wireless coverage in the near term, as TM focuses on deploying LTE in selected major cities.

FCF Deficit in 2016: Fitch expects cash flow from operations of MYR3.0bn-3.2bn will not be sufficient to cover capex and dividend commitments. Our forecasts assume a flat operating EBITDAR of MYR4.0bn this year, as opex will rise to support subscriber acquisition and growth in fibre broadband services. We also anticipate continuing EBITDA losses for TM's 72.9%-subsidiary Packet One Networks (Malaysia) Sdn Bhd (P1).

Fibre Growth: Fibre network-based and triple-play services are likely to drive long-term expansion in operating EBITDAR, amid low penetration and rational competition. Fitch expects revenue to grow in the range 3.0%-4.3% in 2016-2018, driven by user migration on to higher-speed plans, increasing adoption of triple-play services, and the expansion of TM's fixed-broadband services through HSBB2 and SUBB.

Close Sovereign Linkages: TM's rating of 'A-' includes a single-notch uplift from its standalone credit profile of 'BBB+', to reflect the Malaysian sovereign's (A-/Stable) ultimate 56%-majority state-ownership and strategic influence through board representation. TM spearheads the nation's broadband network projects; most recently the HSBB2 and SUBB developments.

LIQUIDITY AND DEBT STRUCTURE

Solid Liquidity: TM's cash and cash equivalents of MYR3.5bn at end-2015 is sufficient to cover its next 12 months' debt obligations of MYR408m. Liquidity is strengthened by proven access to capital markets - in light of the company's market and financial position. The total on-balance sheet debt of MYR7.6bn comprised 97% unsecured debt and 28% in foreign-denominated debt, of which 57% has been hedged. The average debt maturity is over six years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for TM include:

• Low- to mid-single-digit revenue growth in 2016-2019 
  
  
• Operating EBITDAR margin of 33%-34% in 2016-2018, reflecting rising cost pressures and ongoing EBITDA losses for the wireless segment 
  
  
• Accelerated rollout of HSBB2 and SUBB projects in the initial years, coupled with timely disbursement of government grant according to the rate of completion for these projects 
  
  
• LTE investments amounting to MYR1bn in 2016-2018 
  
  
• Gross capex of MYR3.3bn-3.6bn in 2016 and 2017 
  
  
• Minimum dividend payments of MYR700m, in line with TM's stated payout policy. 

• Negative rating action on the sovereign's Foreign-Currency IDR 
  
  
• Weakening of linkages with the sovereign 
  
  
• FFO-adjusted net leverage exceeds 2.25x on a sustained basis (2.0x previously) 
  
  
• Operating EBITDAR margin falls below 30% on a sustained basis. 

The revision in the leverage guidelines reflect our view that TM's business risk has improved, underscored by its continued dominance in the fixed broadband market and growth opportunities in triple-play services.

Positive: Any rating upgrade would be contingent on a prior upgrade of the sovereign Foreign-Currency rating. Should this happen, developments that may, collectively, lead to positive rating action would include:

• Evidence of closer ties between TM and the sovereign, for example sovereign guarantee of debt
  
  
• Significant, sustained improvement in TM's standalone financial profile, for example FFO-adjusted net leverage falling below 1.0x, operating EBITDAR margin above 35%, and positive post-dividend FCF. 

However, we consider neither of the above to be likely in the medium term.

FULL LIST OF RATING ACTIONS

Telekom Malaysia Berhad

Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook is Stable

Foreign-currency senior unsecured rating affirmed at 'A-'.