OREANDA-NEWS. Fitch Ratings has affirmed Telekom Malaysia Berhad's (TM) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Negative. Simultaneously, the agency has affirmed TM's foreign-currency senior unsecured rating at 'A-'.

Although headroom at the current rating level is relatively low, the Negative Outlook is due to the Negative Outlook on the Malaysian sovereign, TM's ultimate owner, rather than an expectation that the company's standalone financial performance will deteriorate.

KEY RATING DRIVERS

Close Sovereign Linkages: TM's rating of 'A-' is based on a single-notch uplift from its standalone credit profile of 'BBB+' to reflect the Malaysian sovereign's (A-/Negative) majority state-ownership of 56% at end-January 2015 through Khazanah Nasional Berhad, the Employee's Provident Fund and Amanah Raya Trustees Berhad. The fixed-line incumbent continues to be strategically important to the government, and Khazanah exercises significant influence on TM's strategic and operational decisions through board representation.

Higher Leverage, Negative FCF: We expect TM's 2015 funds flow from operations (FFO)-adjusted net leverage to rise to 1.8x (2014: 1.7x), near the 2.0x level above which we may consider a negative rating action. Fitch forecasts 2015 FFO of MYR3.1bn, which may be insufficient to fully cover capex (MYR2.6bn) and dividends (MYR0.9bn). Consequently, in our opinion, there is little scope for deleveraging.

Wireless Drag on Profitability: TM's operating EBITDAR margin will likely be around 34% in 2015-2017 (2014: 35%) amid rising cost pressures and on-going EBITDA losses of newly-acquired 55.3%-subsidiary, Packet One Networks (Malaysia) Sdn Bhd (P1). However, we believe that continuing growth in its fibre network-based services should continue to drive EBITDA expansion, albeit at a slower rate. TM has set a target for the non-wireless business to grow by 4.0%-4.4% in 2015 in terms of revenue and EBIT.

Rising Capex: We see capex increasing to MYR2.6-2.8bn (21%-22% of revenue) in the medium term, from MYR2.0-2.5bn previously. The incremental capex will go into LTE expansion, with TM planning to invest about MYR1bn in the next three years in P1. For its fixed-line business, TM plans to increase capex to 20% of revenue, up from the 2014's 16.3%, to fund copper network enhancements.

Strong Fibre Growth: Fitch expects the expansion of TM's fibre business to continue on the back of low fibre penetration and rational competition. Rapid migration by consumers onto higher-speed broadband plans and the rising adoption of triple play services (which comprise voice, broadband and internet protocol TV services) should continue to drive an increase in average revenue per user (ARPU) from its fibre business.


KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Mid-single digit revenue growth in 2015-2017
- EBITDAR margin of 34% in 2015-2017, reflecting rising cost pressures and on-going EBITDA losses for its wireless segment
- Annual capex of MYR2.6-2.8bn in 2015-2017, which includes about MYR1bn of investments in P1 for LTE expansion
- Dividend payments in line with a payout policy of 90% in the last three years

RATING SENSITIVITIES

TM's Negative Outlook reflects a similar Outlook on sovereign's ratings. Should the sovereign's Foreign-Currency IDR be downgraded to 'BBB+' from 'A-', the government's credit strength would be the same as TM's standalone profile and Fitch will not provide any uplift to TM's ratings for government support.

Positive: Future developments that may collectively, lead to the Outlook being revised to Stable includes:
- Revision of Malaysia's Outlook to Stable from Negative

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A downgrade of Malaysia's Foreign-Currency IDR to 'BBB+'
- FFO-adjusted leverage exceeds 2.0x
- Operating EBITDAR margin falls below 30% on a sustained basis.

FULL LIST OF RATING ACTIONS

Telekom Malaysia Berhad
Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Negative
Foreign-currency senior unsecured rating affirmed at 'A-'