Aug 11, 2011

Fitch Ratings affirms Telkom at BB+

Fitch Ratings has affirmed PT Telekomunikasi Indonesia Tbk's (Telkom) long-term foreign-and local-currency issuer default ratings (IDRs), as well as its senior unsecured rating at BB+. The outlook is positive.
Given the Indonesian sovereign's (BB+/Positive) majority ownership (52.58% at end-June 2011) and significant influence over Telkom, the company's ratings are capped at the level of the sovereign. 
Any change therefore in the sovereign rating will lead to a corresponding change in Telkom's ratings. Telkom's rating reflects its position as Indonesia's dominant incumbent operator and its relatively conservative credit profile. 
Telkom is the market leader in the fixed-line and broadband segments, while its 65% subsidiary-PT Telekomunikasi Selular (Telkomsel, BBB-/Stable)-leads the wireless segment. 
Telkom has a strong financial profile compared with other Fitch-rated Asia-Pacific telecom companies, with high operating EBITDAR margins (FYE10: 54.1%), low funds from operations (FFO)-adjusted net leverage (FYE10: 0.7x) and strong pre-dividend free cash flow margins (FYE10:16.5%). 
Telkom's liquidity is strong; at FYE10 cash and equivalents were Rp9 trillion and available committed credit facilities were Rp4 trillion.
The key concern for Telkom's financial profile would be any potential acquisition of Singapore Telecom's (A+/stable) 35% stake in Telkomsel. 
Fitch notes that although Telkom's plan is still in the discussion stage, any largely debt-funded transaction is likely to lead to a deterioration in credit metrics. 
The agency notes that if shareholder returns are higher than currently envisaged (average dividend payout of 50%-55% of net income and Rp5 trillion of share-buybacks), the company's financial profile will decline. During 2010, despite Telkom's revenue growing by 1.4% yoy, operating EBITDAR grew only by 1% due to margin pressures in the wireless segment. 
Fitch expects Telkom's operating EBITDAR margins to continue to decline marginally as management focuses on adding more wireless subscribers at the expense of lower tariffs.
Other than a sovereign upgrade, Telkom's ratings may be upgraded if the links between the government and Telkom weaken, as these ties currently constrain the rating. 
On the other hand, Telkom's ratings might be downgraded if credit metrics deteriorate significantly due to an increase in shareholder returns, and/or from any major unforeseen debt-funded acquisitions. 

Disclosure: No position at the stock mentioned above.

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