Fitch Ratings has affirmed PT Telekomunikasi Selular's (Telkomsel) long term foreign currency issuer default rating (LTFC IDR) at BBB- with stable outlook, and long term local currency IDR (LTLC) at BBB with positive outlook.
At the same time, the agency has affirmed Telkomsel's national long-term at AAA(idn) with stable outlook and its senior unsecured rating at BBB-.
The ratings reflect Telkomsel's entrenched, leading market position in Indonesia's wireless telecom sector. In 2010, Telkomsel's subscriber base grew 15% to 94 million, representing an overall subscriber market share of 40%.
More importantly, Telkomsel's revenue market share (RMS) is 57%, based on the country's top-three GSM wireless operator's revenues.
Fitch views Telkomsel's credit metrics as strong for its ratings with exceptionally high EBITDA margins (FY10: 62.2%), comfortable pre-dividend free cash flow margins (22%) and a low financial leverage (funds flow from operations to net adjusted leverage) of 0.4x.
The ratings take into account the possibility of gradual declines in Telkomsel's EBITDA margins over the medium-term, due to higher-than-expected competitive intensity, difficulties in sustaining its premium tariffs against other telecoms, higher operating expenses (including larger data marketing costs), and additional expenses for network infrastructure expansion.
The agency notes that Telkomsel's RMS (based on the top-three players) fell in 2010 to 57% (2009: 61%), and expects this downward trend to continue, albeit gradually, with its two main competitors now focusing on maintaining revenue growth and profitability.
Nevertheless, Fitch believes that a gradual decline in EBITDA margins will not significantly affect Telkomsel's credit profile, and that there is currently a comfortable amount of headroom in Telkomsel's LTLC rating.
Disclosure: No position at the stock mentioned above.
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