Tuesday, August 8, 2017

FW: MARC affirms its AA+IS rating on Celcom networks' RM 5.0 billion sukuk Murabahah programme; outlook remains negative



Posted Date: August 7, 2017

MARC has affirmed its rating on Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme of AAA+IS. MARC continues to maintain a negative outlook on the rating.

CNSB provides network telecommunication services to its parent, Celcom Axiata Berhad (Celcom), through network telecommunication assets. The rating and outlook are premised on the overall credit profile of the Celcom group given the financial and operational linkages within the group. This approach is supported by a letter of support from Celcom to maintain 100% direct or indirect equity interest in CNSB throughout the sukuk tenure.

The affirmed rating is mainly driven by Celcom’s position as one of the leading domestic mobile network operators with strong operating cash flow (CFO) generating ability. The continued negative outlook reflects Celcom’s lack of improvement in its financial metrics during the period under review. In MARC’s opinion, there is a potential for further weakening in Celcom’s credit metrics given the increasingly challenging operating environment for telco players. This has been evident in the 12.0% y-o-y decrease in Celcom’s revenue to RM6.4 billion (2015: RM7.3 billion). Celcom’s operating profit margin also declined to 23.0% (2015: 26.2%) on the back of a lower average revenue per user (ARPU) which fell to RM41 in 2016 from RM43 in the previous year.

The rating agency notes that Celcom has since embarked on measures to strengthen its performance, among which are streamlining the company’s operations and employing new network technologies. Celcom has made some progress on key performance areas. Nonetheless, addressing challenges surrounding the company’s sales & distribution channels and 4G network coverage would be critical in improving its performance. Celcom is also expected to conserve its liquidity through reduced dividend flow to parent company Axiata Group Berhad (Axiata) in 2017 and 2018.

In 2016, Celcom’s CFO, which remained flat at RM2.3 billion (2015: RM2.2 billion), was mainly used for capital expenditure (capex) of RM1.3 billion (2015: RM0.9 billion) and dividend payout of RM1.0 billion (2015: RM1.1 billion). The outlays led to its free cash flow turning negative RM55.7 million. Given the need for Celcom to expand and upgrade its long-term evolution network, the company’s capex is projected to increase to an average of RM1.3 billion per annum from 2017 to 2019 compared to an average of RM1.0 billion per annum in the previous three years. MARC believes that in the absence of a prudent dividend policy, it would be challenging for Celcom to maintain its capex plans as well as meet its annual spectrum license fee outlay of RM70.3 million beginning 2017. Under its current AA+IS rating, there is limited headroom for operating underperformance which would exacerbate its financial position.

During the year, Celcom drew down RM500 million under the rated sukuk programme to fund part of the RM816.7 million spectrum fee, increasing its total borrowings to RM5.0 billion. The remaining RM316.7 million was funded by internally generated funds, which led to a further decline in its balance sheet cash to RM1.0 billion as at end-2016 (2015: RM1.6 billion). MARC expects Celcom to refinance the upcoming debt obligations maturing in 2017 and 2019. In 2016, its shareholders’ funds further deteriorated to negative RM908.0 million (2015: negative RM878.2 million), although the persistent negative equity base could be largely addressed if no dividends are declared in 2017. The negative shareholders’ funds has also been the rating agency’s longstanding concern.

The negative outlook reflects the risk of Celcom’s rating being lowered if its financial metrics do not improve from the current levels, in particular its OPBITDA margin that should remain above 30% and its adjusted cash over debt ratio above 45%. The rating agency may revert the rating outlook to stable if Celcom’s financial metrics improve to levels which are commensurate with the current rating band.

Chermayne Eng, +603-2082 2941/ chermayne@marc.com.my;
David Lee, +603-2082 2955/ david@marc.com.my.


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