Jul 19, 2011

Fitch revises BTEL outlook to negative

Fitch Ratings has revised Indonesia-based PT Bakrie Telecom's (BTEL) outlook to negative from stable.  Its long term foreign and local currency IDRs (LTLC) have been affirmed at B. At the same time, the agency has affirmed BTEL's senior unsecured rating at B.
The negative outlook reflects the risk that BTEL's leverage and coverage ratios may remain in breach of the agency's negative rating action guidelines, particularly if management's guidance for strong revenue growth during FY11 does not materialize. 
Lower than expected revenue growth caused BTEL's net adjusted debt to EBITDAR leverage to increase to 4.1x at FYE10 from 3.6x at FYE09, slightly above the agency's negative rating guidance of 4.0x, and its funds from operations interest coverage to fall to 3.1x from 3.9x during the same period.
Despite BTEL's subscriber count growing by a robust 23% during FY10, revenue only grew 0.8% yoy, before falling 1.3% yoy in 1Q/11. 
Management of Bakrie Telecom is expecting a significant improvement in FY11, guiding for its gross revenues to grow by 30% to approximate Rp4.5 trillion. 
However, Fitch's negative outlook takes into consideration the ongoing downward pressure on BTEL's average revenue per user (ARPU) due to competitive pressures in the Indonesian Telecom market, as well as the high capital expenditure requirements BTEL is facing during FY11 and FY12. 
While Fitch expects that BTEL's subscriber base will continue to grow in FY11, the extent of revenue growth is likely to be limited if ARPUs continue to fall, and the company's EBITDA margins (FY10: 48.3%) could also come under pressure. 
The ratings may be downgraded if adjusted net debt to EBITDAR leverage remains above 4x, and operating EBITDA to gross interest expense coverage falls below 2.5x over the next 2 years. Conversely, the outlook may be revised to stable if the reverse of these measures takes place.
The ratings reflect BTEL's position as Indonesia's second-largest operator of code division multiple access (CDMA) technology and the fifth-largest cellular operator by subscriber market share. 
BTEL's subscribers totalled over 13 million at FYE10, representing 5.5% of the Indonesian cellular market. 
Following the receipt of full mobility from the regulator in April 2011, BTEL's subscribers will be able to receive network coverage island-wide, allowing the company to compete on a more equal footing with GSM operators that dominate the Indonesian telecom market. 
Fitch notes that during FY10 BTEL launched broadband wireless access (BWA) data services based on its CDMA EVDO technology. 
Strong growth from a low base is likely during FY11 and FY12, and BTEL expects this service to contribute 13% of total gross revenues during FY12.
Notwithstanding its attractive EBITDAR margin above 45%, BTEL's rating is constrained by its position as a sub-scale operator in a highly competitive market, high interest payments and high capex requirements that may result in negative free cash flow generation (FCF). 
Compared to actual capex of Rp1.8 trillion in FY10, and budgeted capex of Rp1.6 trillion in FY11, the company is projecting capex to fall to about 50% of 2011's level from 2012 onwards. 
Fitch notes that this is in contrast to most other telecom companies worldwide, which are expecting capex to remain stable or increase to maintain product competitiveness and service value. Accordingly there is a risk that BTEL's capex reduction plan could decelerate the company's growth compared to the industry over the medium term. 
BTEL's ratings are a notch below its standalone rating of B+, due to corporate governance issues and the weak financial and liquidity position of its parent, PT Bakrie Brother Tbk (BNBR), which has a 45.05% direct and indirect interest in BTEL. BTEL's dividend payout policy is to distribute 15%-25% of net income after tax, but debt covenants have prevented the company from distributing dividends whilst FCF generation remains negative. 
Deterioration in the financial and liquidity position of BNBR, or worsening corporate governance, may lead to negative rating action. 
Conversely, a significant weakening of the linkage between BNBR and BTEL may result in BTEL being rated at its standalone level. 

Disclosure: No position at the stock mentioned above.

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