TEXT-Fitch Affirms Telekom Malaysia at 'A-'; Outlook Stable

(The following was released by the rating agency)

SINGAPORE, October 09 (Fitch) Fitch Ratings has affirmedTelekom Malaysia Berhad's (TM) Long-Term Issuer Default Rating(IDR) and senior unsecured rating at 'A-', respectively. TheOutlook is Stable.

The ratings are notched up one level from TM's standalone'BBB+' rating to reflect actual and implied support from theMalaysian sovereign ('A-'/Stable). The government collectivelyowns 51.5% of TM through Khazanah Nasional Berhad, theemployees' provident fund board and Amanah Raya Trustees Berhad.As the country's leading fixed-line and broadband company, TMcontinues to be strategically important to Malaysia. Thegovernment exercises significant influence on TM's strategic andoperative decisions through its representation on the company'sboard of directors.

A one-time capital repayment of MYR1.1bn in August 2012 hasreduced the headroom in the company's ratings. Fitch expectsthis repayment to lift funds flow from operations (FFO)-adjustednet leverage to 1.7x-1.8x by end-December 2012, closer to theagency's negative guidance of 2.0x. Fitch expects TM to continuewith its normal dividend policy of minimum MYR700m or 90% of itsnet income and the agency does not expect further significantcapital repayments in the short term. During 2008-2012, specialdistributions totaled MYR5.7bn, as TM returned the sale proceedsof its stake in Axiata Group Berhad and of other non-core assetsto shareholders.

Nevertheless, Fitch expects TM's balance sheet to improve inthe next 12 to 24 months due to stable operating EBITDAR margins(36%-37%) and lower capex. TM's operating EBITDAR margins shouldbenefit from growing economies of scale in the high speedbroadband (HSBB) segment which is likely to offset a decline indata tariff due to rising competition. Fitch also expects TM'scapex as a share of revenue to peak at 24%-25% in 2012 as themajority of its HSBB network is completed.

What Could Trigger a Rating Action?

Positive: Future developments that may, if sustained,collectively lead to a positive rating action, include:

- FFO-adjusted net leverage falling below 1.0x - Operating EBITDAR margins above 35% - Positive post-dividend FCF generation

However, if TM's standalone ratings were to be upgraded to'A-', the same level as the government's, the company would nolonger benefit from a notch uplift for government support.

Negative: Future developments that may, individually orcollectively, lead to negative rating action include:

- A negative rating action on sovereign's FC IDR

- FFO-adjusted net leverage exceeding 2.0x on a sustainedbasis

- Operating EBITDAR margins falling below 30% on a sustainedbasis