OREANDA-NEWS. Fitch Ratings has affirmed Telekom Malaysia Berhad's (TM) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-', and revised the Outlook to Stable from Negative. The agency has simultaneously affirmed TM's foreign-currency senior unsecured rating at 'A-'. A full list of rating actions is at the end of this Rating Action Commentary.

The rating action follows Fitch's revision of the Outlook on the Malaysian sovereign to Stable from Negative on 30 June 2015 (see 'Fitch Affirms Malaysia's Long-Term Foreign Currency rating at 'A-'; Outlook Revised to Stable'). The Negative Outlook on the sovereign had been the reason for the previous Negative Outlook on TM.

KEY RATING DRIVERS

Close Sovereign Linkages: TM rating of 'A-' is based on a single-notch uplift from its standalone credit profile of 'BBB+', to reflect the Malaysian sovereign's (A-/Stable) majority state-ownership of 56% at end-June 2015 through Khazanah Nasional Berhad, the Employees Provident Fund, and Amanah Raya Trustees Berhad. The fixed-line incumbent continues to be strategically important to 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 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, we feel there is little scope for deleveraging.

Wireless Drag on Profitability: TM's operating EBITDAR margin is likely to be around 34% in 2015-2017 (2014: 35%) amid rising cost pressures and ongoing EBITDA losses of newly acquired 55.3%-subsidiary Packet One Networks (Malaysia) Sdn Bhd (P1). However, we believe that continuing growth in TM's 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 rising to MYR2.6bn-2.8bn (21%-22% of revenue) in the medium term, from MYR2.0bn-2.5bn. 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 2014's 16.3% - which will be used to fund copper network enhancements and other service improvements.

Strong Fibre Growth: Fitch expects the expansion of TM's fibre business to continue due to low fibre penetration and rational competition. Rapid migration by consumers on to 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 the 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 ongoing EBITDA losses for the wireless segment
- Annual capex of MYR2.6bn-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
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the sovereign's Foreign-Currency IDR
- Weakening of linkages with the sovereign
- FFO-adjusted leverage exceeds 2.0x on a sustained basis
- Operating EBITDAR margin falls below 30% on a sustained basis.

Positive: Any rating upgrade would be contingent on a prior upgrade of the sovereign Foreign- Currency rating. Should this happen, developments that may, collectively, lead to positive rating action include:
- Evidence of closer ties between TM and the sovereign, for example sovereign guarantee of debt
- Significant, sustained improvement in TM's standalone financial profile, for example FFO-adjusted leverage falling below 1.0x, operating EBITDAR margins above 35%, and positive post-dividend FCF.

However, we consider neither of these to be likely in the medium term.

LIQUIDITY AND DEBT STRUCTURE
Solid Liquidity: TM's cash and cash equivalents of MYR3.5bn at end-2014 were sufficient to pay short-term debt maturities of MYR197m. Liquidity is strengthened by the company's access to capital markets - in light of its market and financial position. Of total on-balance sheet debt of MYR6.4bn, 96% is unsecured and 25% in foreign-denominated debt. The average debt maturity is over seven years.

FULL LIST OF RATING ACTIONS

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