MARC has affirmed its rating on Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme at AAAIS.

Aug 28, 2014 -
MARC has affirmed its rating on Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme at AAAIS. Concurrently, the outlook on the rating has been revised to negative from stable. CNSB owns the core network assets of its parent Celcom Axiata Berhad (Celcom) and serves mainly as a network service provider to the Celcom group. The rating and outlook of CNSB are derived from the consolidated credit quality of Celcom based on MARC’s assessment of a very high probability of parental support given the strategic position of CNSB within the Celcom group and the significant financial and operational links between the two entities. In addition, the assessment is underpinned by a letter of support from Celcom to maintain a 100% direct or indirect equity interest in CNSB throughout the sukuk tenure.
The outlook revision reflects increasing risks associated with the Celcom group’s persistent negative free cash flow (FCF) and negative shareholders’ equity on the back of significant dividend payments to parent company Axiata Group Berhad (Axiata). The previous stable outlook had factored in MARC’s expectation that Celcom would restore its cash flow protection and leverage metrics to levels that are commensurate with its rating. However, Celcom group’s negative consolidated shareholders’ funds widened to RM850 million as at end-2013 (end-2012: negative RM644 million) as a result of dividend payments totalling RM2.3 billion (2012: RM3.1 billion).
The rating affirmation of the Celcom group largely takes into account the mobile network operator’s strong market position, and solid and stable operating cash flow (CFO) generation. Celcom has expanded its market share to a subscriber base of 13.1 million as at end-2013 and has become the leading player in the Malaysian mobile subscribers market. The group’s market share gain was also supported by further consolidation of its leadership position in the wireless broadband segment in which Celcom registered a 17% growth in subscriber numbers in 2013. Supported by strong mobile network coverage and aggressive growth strategies, group revenues rose 3.8% year-on-year to RM7.9 billion. While Celcom’s share of the industry total revenue continues to lag Maxis Communications Berhad, MARC takes cognizance of the management’s ability to provide sustained earnings growth.
The Celcom group’s financial strength is underlined by its business strategy to form and leverage on strategic partnerships with six mobile virtual network operators (MVNO), spectrum sharing with Altel Communications Sdn Bhd and network collaboration with DiGi Telecommunications Sdn Bhd. Network cost savings were evident in 2013, represented by a 5% decrease in network cost to RM762 million. Correspondingly, Celcom group’s operating margin improved to 33.2% (2012: 31.6%). To manage competition from over-the-top (OTT) applications providing cheaper substitutes for traditional voice and messaging services, the company is undertaking aggressive network modernisation and long-term evolution (LTE) deployment programmes to capture and monetise the rapid growth in mobile data consumption. MARC views that the improved mobile data services would be a key factor for Celcom’s ability to retain its subscriber market leadership position.
The Celcom group’s strong CFO generation ability and healthy liquidity position continue to be in line with MARC’s expectations of a AAA-rated entity. The CFO of RM2.5 billion generated in 2013 provide ample coverage of 0.47 times (2012: 0.67 times) against outstanding debt. Coupled with available cash resources of RM3.3 billion as at end-2013 (end-2012: RM3.7 billion), Celcom has sufficient liquidity to prefund annual capital expenditure requirements of about RM1.0 billion and meet upcoming debt maturities. In addition, MARC notes that CNSB is able to roll over its maturing debts (first sukuk repayment of RM500 million is due in August 2015) under its 15-year sukuk programme.
The negative outlook reflects the risk of Celcom group’s rating being lowered if cash flow protection leverage metrics are not restored to levels more appropriate for its current rating band. Further downward pressure on the rating could also arise if (1) CNSB’s strategic importance to Celcom group weakens which would warrant a change in its rating to reflect reduced parental support; (2) Celcom group is increasingly exposed to parent credit risk which may require the rating to be brought more in line with Axiata’s; and/or (3) Celcom group’s consolidated financial metrics deteriorate materially. Conversely, the rating agency may revert the rating outlook to stable if the group improves its consolidated capital structure and generates positive FCF on a more sustained basis.
Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.