JAKARTA (TheInsiderStories) – Fitch Ratings has affirmed Indonesian telecom operator PT Indosat Tbk’s (IDX: ISAT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘BBB+’, and simultaneously affirmed the foreign-currency senior unsecured rating at ‘BBB+’.
Fitch Ratings Indonesia has also affirmed Indosat Ooredoo’s National Long-Term Rating at ‘AAA(idn)’. The Outlooks are Stable.
‘AAA’ National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.
KEY RATING DRIVERS
Parent’s Support Drives Ratings: Indosat Ooredoo’s ‘BBB+’ IDRs include a three-notch uplift from its standalone credit profile of ‘BB+’ due to the legal and strategic linkages with its Qatar-based 65 per cent parent, Ooredoo Q.S.P.C. (A/RWN).
Ooredoo’s bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat Ooredoo, one of Ooredoo’s largest subsidiaries, accounting for 25 per cent of its 2017 revenue and 28 per cent of EBITDA. The corporate-wide rebranding to “Indosat Ooredoo” also underscores the reputational risk to the parent.
Rating Pierces Country Ceiling: Indosat Ooredoo’s Long-Term Foreign-Currency IDR is one notch higher than Indonesia’s ‘BBB’ Country Ceiling, aligning it with the Long-Term Local-Currency IDR (LC IDR). Fitch believes a strong foreign parent, Ooredoo, would provide financial support through foreign exchange to service Indosat Ooredoo’s hard-currency external debt, thus allowing Indosat Ooredoo’s Foreign-Currency IDR to pierce Indonesia’s Country Ceiling.
‘BB+’ Standalone Profile: Indosat Ooredoo’s standalone credit profile of ‘BB+’ reflects its established market position as Indonesia’s second-largest telecom operator, operating EBITDAR margin of over 40 per cent, and moderate FFO adjusted net leverage of around 2.0x (2016: 2.2x). We do not foresee any meaningful debt reduction in the next 12-18 months, as Indosat Ooredoo is likely to reinvest EBITDA into capex investments. At end-September 2017, the company’s annualised net debt/EBITDA was 1.6x, near its 1.5x target.
Positive Free Cash Flow: We forecast cash flow from operations of around IDR10 trillion, sufficient to cover cash capex and dividends. Capex/revenue is likely to be in the range of 25 per cent-27 per cent in 2018 and 2019 (2016: 25 per cent), as a greater rollout of the long-term evolution (LTE) network and the expansion of mobile coverage outside of Java offset cost savings from group-wide procurement activities.
The capex projection for 2018 also includes spectrum payments for the 2100MHz frequency, comprising IDR432 billion each in upfront fees and an annual licence fee for the next 10 years.
Margin Erosion: Rising contributions from markets outside Java and the continuing revenue shift to data services may result in narrowing operating EBITDA margins to the low ’40s in 2018-2019 (2016: 43.8 per cent). We expect competition to stabilise, though the introduction of prepaid SIM-card registration may cause a temporary dip in revenue or higher market costs as telecom operators offer incentives to retain subscribers ahead of the February 2018 deadline.
Manageable US Dollar Debt Exposure: Indosat Ooredoo’s exposure to US dollar-denominated debt had come down to 5 per cent by end-September 2017 (end-2016: 12 per cent), lowering its vulnerability to rupiah depreciation and earning volatility. The company had hedged 75 per cent of its US dollar exposure through foreign-exchange forward swaps. Indosat Ooredoo had Rp21 trillion in outstanding debt, including obligations under finance leases, as of end-September 2017.
Indosat Ooredoo’s ratings include implied support from its overseas parent, Ooredoo. We assess that the ties between the stronger parent and Indosat Ooredoo are moderate and therefore rate the subsidiary on a bottom-up basis under our Parent and Subsidiary Rating Criteria. Indosat Ooredoo is rated one notch above Indonesia’s Country Ceiling of ‘BBB’.
In line with Fitch’s “Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria”; this incorporates our view that hard-currency support from Ooredoo would be available to service the Indonesian subsidiary hard-currency external debt, thus shielding the latter from transfer and convertibility risks.
Indosat Ooredoo is well positioned against its closest peer, PT XL Axiata Tbk (XL, BBB/AAA(idn)/Stable), based on the scale of its mobile operations in Indonesia and a more conservative financial profile. It has lower net leverage of around 2.0x and foreign-denominated debt exposure of 5 per cent, compared with XL’s 2.3x and 32 per cent, respectively.
Meanwhile, the incumbent telecom operator, PT Telekomunikasi Indonesia Tbk (Telkom, BBB/Stable), has a stronger market position in both fixed-line and mobile markets; wider EBITDA margins; and lower net leverage. However, Telkom’s IDRs continue to be capped by Indonesia’s sovereign rating (BBB/Stable), due to the strong links between the company and the state through control of the board and key operating and financial decisions.