OREANDA-NEWS. Fitch Ratings Indonesia has affirmed PT Tiphone Mobile Indonesia Tbk's (Tiphone) National Long-Term Rating at 'A-(idn)' and revised the Outlook to Negative from Stable. At the same time, the agency has affirmed Tiphone's IDR2trn bond programme and IDR500bn bond issued under the programme at 'A-(idn)'.

The Negative Outlook reflects the negative cash flow from operations (CFO) in the last few years, which is likely to persist in the medium term. Fitch believes this will remain the major risk for the company because it is likely to impair the company's debt repayment capacity and access to funding. The negative CFO stems from the high working capital intensity of the business, which offsets the stable cash flow arising from the business of distributing prepaid vouchers for PT Telekomunikasi Selular (Telkomsel, AAA(idn)/Stable).

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Risks of Sustained Negative CFO: Tiphone's voucher and handset businesses require high working capital for inventory purchases. This pushed CFO into negative territory in 2012-2015. The company's CFO turned positive in 1Q16, but Fitch does not believe there has been a fundamental shift in Tiphone's working capital cycle. If the trend of negative CFO persists, the company's debt repayment capacity and ultimately its refinancing ability would be impaired. Fitch has revised its rating sensitivities to focus on CFO rather than net working capital days in light of the continued stress on working capital, and the high risk of obsolescence of handsets, which could distort working capital days.

The risks of prolonged negative CFO are partly mitigated by the company's good access to funding, which is evident from the availability of seasonal working capital loans of around IDR200bn and the refinancing of its short-term loans with a syndicated loan in 2015.

Working Capital Keeps Leverage High: Tiphone has had to seek external borrowing to finance its high working capital and this has resulted in gross debt/EBITDA reaching a peak of 4.3x in 2015. Fitch estimates leverage will fall to 3x-3.5x in 2016 and 2017 due to higher EBITDA from the growing voucher business following the acquisition of PT Simpatindo Multi Media (Simpatindo) in 2015.

Stable Cash Flow from Telkomsel: Tiphone's rating benefits from its 10-year relationship with Telkomsel, for which Tiphone is the largest distributor of prepaid vouchers and starter packs. Tiphone accounts for around 30% of Telkomsel's voucher sales. Telkomsel is the leading mobile operator in Indonesia in terms of revenue, subscribers and network coverage. The dominance of prepaid users in the Indonesian market and Telkomsel's sustained market leadership will ensure cash flow stability for Tiphone.

Lower Handset Contribution Positive: Fitch expects the voucher business to account for more than 75% of Tiphone's EBITDA during 2016-2018 (2015: 68%) as the company shifts its focus away from the more competitive handset business. Handset sales are more competitive because of the large number of small retailers, expanding online sales platforms, rental expenses to establish stores and changing consumer tastes.

In addition, Fitch believes the voucher business also carries less inventory risk than the handset business. Vouchers are easier to liquidate and not prone to obsolescence, and demand has been rising as customers use more and more data services.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Tiphone include:

- Stable average selling prices in the voucher business until 2018

- Sales volume in the voucher business to rise 10%-15% a year from 2016

- Annual capex of IDR22bn from 2016

- Dividend payout ratio of 25% a year from 2016

RATING SENSITIVITIES

Positive : Future development that may, lead to revision of the Outlook to Stable include:

- CFO turns positive on a sustained basis.

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

-Inability to turn CFO positive in 2016