Dec 6, 2010

Moody's upgrades XL Axiata to Ba1

Moody's Investors Service has upgraded the local currency corporate family rating for PT XL Axiata Tbk (XL) to Ba1 from Ba2. The outlook on the rating is stable.
"The decision to upgrade XL reflects the improvement in the company's operating and financial profile such that financial metrics, particularly debt/EBITDA of 1.6x are now strong for the fundamental Ba2 rating level," said Laura Acres, a Moody's Vice President and Senior Credit Officer.
"Such a profile provides the company with the financial flexibility to withstand any short term spike in competition as well as the payment of dividends in line with the stated policy of 15% to 20%," added Acres, Moody's Lead Analyst for XL.
XL's rating combines an assessment of its fundamental strength which at Ba2 reflects its established network and market position as Indonesia's third largest cellular operator in terms of revenue and subscribers, and by the expectation of moderate growth in the cellular market, an improving macro-environment, and XL's improving and strong financial profile.
However, this view is counter-balanced by various challenges, including a very competitive environment and exposure to emerging market risk.
The final rating of Ba1 incorporates a one-notch uplift arising from the credit support that Moody's believes the parent, Axiata Group Berhad (Axiata, rated Baa2), is likely to provide in a distress situation.
XL is majority owned by Axiata and is its largest non-domestic business, representing 26% of its subscribers, 39% of revenues, and 46% of reported EBITDA (for YTD September 2010), therefore, we consider it a strategic investment for Axiata.
The stable outlook reflects Moody's expectation that XL will maintain its current financial profile and execute on its business plan as outlined.
Further upward rating pressure is limited given the degree of competition in the Indonesian cellular market as well as the company's third player status.
Moody's is also cognizant of emerging market risks which need to be incorporated into the rating and which are currently evidenced by the Government rating of Ba2/under review for possible upgrade.
Downward pressure on XL's stand-alone rating could emerge should there be any material deterioration in its underlying credit strength, and which would arise from diminishing operating margins, weaker operating cash flow, or rising FX risk; all of which may be reflected in adjusted debt/adjusted EBITDA rising above 2.5-3.0x, or retained cash flow/adjusted debt falling below 25%.
In addition, the one-notch uplift derived from the support from Axiata could be removed if Axiata's shareholding in XL falls below 50%, or if Axiata indicates that it is no longer a core asset for the group.
The principal methodology used in this rating was Global Telecommunications Industry published in December 2007.
The last rating action on XL was on 14th December 2009 when Moody's revised the outlook on XL's Ba2 ratings to stable from negative following the successful completion of a US$300 million rights issue resulting in an improved capital structure.
XL is the third largest cellular provider in Indonesia in terms of revenues and subscribers; as of 30th September 2010, XL had 38.5 million subscribers, of which 99% were prepaid.
XL owns a nationwide cellular network covering all major cities in Java, Bali and Sumatra as well as population centers in Sulawesi and Kalimantan.
It has the second largest mobile network in Indonesia, with 21,623 base transceiver stations (BTS) as of September 2010, and of which one third are outside Java.
XL is 66.7% owned by Axiata, in turn 68.2% owned by Khazanah Nasional Berhad and other Malaysian government related entities. UAE-based Emirates Telecommunications Corp (Etisalat, Aa3/URPD) holds 13.3% of XL's shares and the public the remainder. 

Disclosure: No position at the stock mentioned above. 

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