(The following statement was released by the rating agency)
Oct 03 - =============================================================================== Summary analysis -- Telekom Malaysia Bhd. ------------------------- 03-Oct-2012 =============================================================================== CREDIT RATING: A-/Stable/-- Country: Malaysia Primary SIC: Communications services, nec Mult. CUSIP6: 87942U =============================================================================== Credit Rating History: Local currency Foreign currency 21-May-2009 A-/-- A-/-- 02-Sep-2004 A/-- A-/-- =============================================================================== Rationale
The rating on Malaysia-based telecom operator Telekom Malaysia Bhd. (TM) reflects the company's dominant position in the domestic fixed-line, data, and broadband markets, and its stable cash flows. A decline in TM's traditional voice fixed-line revenues and the company's limited cash flow diversity partly offset these strengths.
We view TM's business risk profile as "strong," as defined in our criteria. We attribute the company's strong operating cash flows to its dominant fixed-line business and Malaysia's stable economic and regulatory environment. TM has a market share of more than 95% in the fixed-line telephony and broadband segment. It also accounts for about 50% of Malaysia's overall broadband revenue. The company has rolled out Malaysia's high-speed broadband (HSBB) network to 1.26 million premises as of June 30, 2012, securing more than 30% acceptance for its triple play (IPTV, internet, and phone) Unifi services. Nevertheless, we expect competition to increase over the next 12 months as wireless players leverage on TM's HSBB network to provide bundled services.
We expect the company to maintain stable operating performance in 2012, with slightly faster revenue growth but lower margins than in 2011. TM's operating performance has stabilized with the growth in internet, multimedia, and data services, which more than offset a consistent decline in voice revenue. In 2011, the company's revenue increased 4% while voice revenue fell 3%. Its EBITDA margins improved to 33% in 2011 from 32% in 2010. Our expectation of lower margins in 2012 is on account of higher maintenance costs due to the expiry of a two-year warranty on HSBB equipment.
TM's financial risk profile is "intermediate," as defined in our criteria. We expect the company's debt-to-EBITDA ratio to reach 2x in 2012 after remaining 1.5x-1.7x over the past three years. The ratio of debt to capital is also likely to reach about 50% as of Dec. 31, 2012, from 38% in the previous year. The ratios are after adjusting TM's debt with its cash reserves exceeding Malaysian ringgit (MYR) 1.5 billion, which we believe is a sufficient minimum cash reserve for the company's operations.
Our expectation of weaker financial ratios is on account of TM's MYR1.07 billion capital repayment to shareholders in August 2012. The company has generally funded these special distributions to shareholders from proceeds of noncore assets divestitures, such as its stake in Axiata Group Bhd . (BBB/Positive/--; axA+/--). TM also maintains positive free operating cash flow. It has funded capital expenditure, including for the HSBB network, mostly out of internal cash flows and the government's contribution of MYR2.4 billion toward HSBB-related capital expenditure.
We assess TM's stand-alone credit profile to be 'a-'. In accordance with our criteria for government-related entities, we believe the likelihood of extraordinary government support in the event of financial distress is "moderately high". Our view is based on our assessment of the following TM characteristics:
-- "Important" role for the government of Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1; axAAA/axA-1+). TM has an important socio-economic role in the development of the country's telecommunications infrastructure projects.
-- "Strong" link with the government, which indirectly owns about 51% of the company, primarily through Khazanah Nasional Bhd.'s 28.7% holding in TM.