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Singapore (TheInsiderStories) — Moody’s Investors Service has affirmed the Baa1 domestic currency issuer rating of Telekomunikasi Indonesia (P.T.)  (Telkom). At the same time, Moody’s has also assigned a Baa1 long-term foreign currency issuer rating to Telkom.

The ratings outlook remains stable.


“Telkom’s rating is one notch above the rating of the sovereign and
reflects its standalone credit strength without any tangible uplift due
to government ownership,”says Nidhi Dhruv, a Moody’s Vice President and Senior Analyst in a written statement.

He continued, “The rating reflects the company’s established position as Indonesia’s largest integrated telecommunications operator and an operating and financial profile reflective of a strong investment-grade company.”

However, Telkom‘s rating is also constrained by the company’s evolving acquisition strategy, its exposure to Indonesia’s competitive operating environment, and the risk of intervention from the Government of Indonesia (Baa2 stable), given that Telkom is a majority state-owned company.

For the nine months ended September 2018, Telkom recorded slow revenue growth of 2.3 percent year-on-year (YoY) to IDR99.2 trillion due to a tougher 1H 2018 — when compared with 2017 — wherein competition intensified because of the regulator’s introduction of the mandatory registration of prepaid SIM cards.

Revenue growth was driven by 21.2 percent YoY growth in its Data, Internet and IT Services segment, and 32.0 percent growth in its network and other services. However, the revenue increases in these segments could barely offset the revenue decline in its traditional Fixed-Line Voice segment (-14.7 percent) and Cellular Voice and SMS segment (-21.3 percent).

To preserve its strong network quality and coverage in support of the growing demand for data, Moody’s expects Telkom to maintain capex spending at about 25 percent of total revenue over the next few years, which can largely be funded from its cash balance and cash from operations.

Despite intense competition and annual capital expenditures in excess of Rp20 trillion (US$1.5 billion) annually since 2013, Telkom has managed to maintain a strong financial profile. Its leverage, as measured by adjusted debt/EBITDA, has stayed under 1.0x in four out of five years since 2013, while RCF/Debt has remained above 40 percent over the same period.

As at Sept. 30, 2018, however, Telkom’s adjusted debt/EBITDA and
RCF/Debt had deteriorated to 1.3x and 26 percent respectively, on account of the intense competition prompted by the implementation of pre-paid SIM card registration regulations in H1 2018 and the decline in both cellular voice and SMS traffic.

“Although Telkom’s credit metrics for the nine months ended September 2018 weakened slightly, it remains financially strong relative to similarly rated peers in developed countries,”adds Dhruv.

He continued, “Based on Moody’s global rating methodology for the telecommunications sector, Telkom’s financial metrics map to the A – Aaa range, suggesting a high degree of financial flexibility in comparison to its Baa1 rated peers. We expect the company to sustain the strength of its financial profile with leverage staying below 1.5x and RCF/Debt above 25 percent.”

Moody’s also expects Telkom to continue to seek inorganic growth
opportunities to increase its revenue contribution from international
markets, although to date it has not successfully completed any large overseas acquisition.

“While overseas acquisitions could improve Telkom’s scale and geographic diversity, any increase in business risk or a largely debt-funded acquisition could offset those benefits. We expect management to maintain a conservative financial profile and a prudent approach to any acquisition opportunities, along with a judicious mix of debt and equity  funding sources,” Dhruv stated.

Given that Telkom is 52.09 percent owned by the Indonesian government, Moody’s overlays the company’s underlying credit strength of baa1 with its joint default analysis for government-related issuers. However, the final rating reflects Telkom’s underlying credit profile and does not benefit from any tangible uplift due to government ownership.

The outlook is stable, reflecting Moody’s expectation that Telkom will
maintain its dominant market position and conservative financial profile.

Upward rating pressure is unlikely, given that the rating is constrained by the competitive operating environment, as well as the risk of intervention from the government, which could change the company’s financial and shareholder remuneration policies in a stress situation.

Telkom’s credit metrics are strong for the rating level, and downward
pressure is unlikely in the absence of a material and precipitous change in its operating profile. However, a negative action on the Government of Indonesia’s rating could pressure Telkom’s rating.

Telekomunikasi Indonesia (P.T.) (Telkom) is the largest integrated
telecommunications company in Indonesia. The company, along with majority owned subsidiary, Telekomunikasi Selular (P.T.) (Baa1 stable), generated gross revenue of Rp130.5 trillion for the 12 months ended Sept. 30, 2018. Telkom is 52.09 percent owned by the Government of Indonesia.

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