JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the Baa3 issuer rating of PT lndosat Ooredoo Tbk (IDX: ISAT) and has changed the outlook to stable from negative. But, the agency affirmed PT XL Axiata Tbk (IDX: EXCL)’ Baa3 issuer rating with outlook remains stable.
“The change in outlook to stable from negative reflects the improvement in Indosat Ooredoo’ operational metrics, as well as our expectation that the company will maintain its market position while keeping its financial metrics broadly stable over the next 12 – 18 months,” says Stephanie Cheong, the analyst from Moody’s.
Indosat‘ rating continues to incorporate a one-notch uplift based on Moody’s expectation of high likelihood of support from its parent, Ooredoo Q.P.S.C. (A2 stable), in times of need. Despite intense competition in Indonesia’s mobile sector, the provider’ operating and financial profile has improved materially over past several quarters owing to increasing data revenues and its enhanced network.
Its recovering average revenue per user (ARPU) and stable subscriber base have supported revenue growth of 9.2 percent in the first nine months of 2020, outpacing the industry growth which was flat for the same period. The ARPU increased 14 percent to Rp31,700 compared to a year ago, while its subscriber base up 3 percent to 60.4 million over the same period.
Indosat also successfully monetized its non-core tower assets, which has sustained its ability to fund its ongoing large capex programme. As a result, the operator deleveraged faster than Moody’s expectations, with its debt/EBITDA improving to 2.5x at Sept. 30, 2020 from a peak of 3.7x at the end of 2018.
Moody’s expects the pace of the issuer revenue growth to slow over the next 12-18 months given increased competition and a weak economic backdrop. Still, strong demand for data and the company’ improved network quality and reach following its accelerated investments in 4G will support modest revenue growth of around 5 percent until next year.
In addition, she expects Indosat to maintain high capital expenditure intensity, keeping an adjusted spending (including leases) elevated at 42 – 46 percent of revenues over the next 12-18 months, as the company continues to invest in enhancing its 4G networks and expansion outside of Java.
Its large spending plan will continue to drive negative free cash flow over the next 12-18 months, Moody’s expects a portion of that will be funded from its current high cash balance, helping to keep leverage manageable around 2.6 – 2.8 over the next 12 – 18 months, which is within the Baa3 rating thresholds, although at the weaker end.
Indosat‘ liquidity position is good. Its cash and cash equivalents of Rp4.0 trillion as of September and availability under its committed revolver facilities of Rp5.1 billion, combined with its projected operating cash flow of around Rp6.1 trillion over the next 12 months, will be sufficient to cover its debt maturities of Rp3.4 trillion and projected capital spending of Rp10.0 trillion.
Furthermore, Moody’s expects the company will refinance its maturing debt with longer-dated rupiah bonds and bank loans. Given Indosat’ demonstrated strong access to the domestic bank and bond markets, its refinancing risk is manageable.
Cheong rated, expect XL Axitata to deliver modest revenue growth over the next two years, as increasing demand for data services and smartphone penetration should offset pricing pressures due to intensified competition. Its Baa3 rating continues to incorporate a one-notch uplift to reflect Moody’s expectation of extraordinary support from the parent company, Axiata Group Berhad (Baa2 stable), in a distressed situation.
At the same time, the rating is constrained by the competitive operating environment and its large capital expenditure when compared with global industry peers, which temper free cash flow generation. The operator recorded a 5 percent increase in revenues until September, driven by 13 percent growth in data revenues on the back of increased data consumption, partially offset by a steep 27 percent decline in legacy voice and SMS services, which contributed to around 8 percent of total revenues.
Total subscribers relatively flat at 56.9 million over the same period, while ARPU rose from Rp34,000 to Rp36,000 versus the previous year, despite increased pricing competition in the Indonesian mobile sector. Strong demand for data and increasing smartphone penetration should support modest 3 – 4 percent revenue growth over the next 12 – 18 months.
Moody’s also expects the issuer to maintain its strong adjusted EBITDA margins of around 50.0 percent over the next two years as the company focuses on profitable growth and cost control efforts including better management of network-related costs. The rating also incorporates the continued need for XL to invest in increasing its network capacity and coverage, especially outside of Java, which will keep Moody’s-adjusted capital expenditure (including leases) high around 40% of revenue over the next 12-18 months.
In addition, Moody’s expects XL Axiata to participate in the upcoming spectrum auction expected at the end of the year. Still, the agency expects its free cash flow to be slightly positive until 2021, as internally generated cash flows will continue to cover its high capital spending and moderate shareholder returns.
The operator is the third largest cellular provider in Indonesia in terms of revenue and subscriber base. The company is 66.4 percent-owned by Axiata and the parent is in turn 75 percent owned by Khazanah Nasional Berhad and related entities of the government of Malaysia (A3 stable).
XL Axiata rating also reflects its established market position, broadly stable operating performance and good liquidity. The Emirates Telecommunications Grp Co PJSC (Aa3 stable) holds 3.7 percent of the issuer shares and the public the rest.
While, Indosat is an integrated telecommunications network and services provider in Indonesia. The company is the second-largest cellular operator in the country in terms of revenue and active subscribers. It also provides multi-media, data communications, and internet services. The company is 65% owned by Ooredoo.
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