Telekom Malaysia Berhad
Credit Opinion: Telekom Malaysia Berhad: Update to credit analysis
Announcement of Periodic Review: Moody's announces completion of a periodic review of ratings of Telekom Malaysia Berhad
Peer Snapshot: Telekom Malaysia Berhad - June 2020 (LTM): Peer Snapshot
Peer Snapshot: Telekom Malaysia Berhad - March 2020 (LTM): Peer Snapshot
Moody's: Telekom Malaysia's 2014 results support its A3 rating
Singapore, February 27, 2015 -- Moody's Investors Service says that Telekom Malaysia Berhad's ("TMB") FY2014 results support the company's A3 ratings and positive outlook.
TMB recorded revenue growth of 5.7% for 2014, with internet and data revenue up 11.9% and 3.7% respectively year-on-year. TMB's 55.3% investment in Packet One ("P1) has been consolidated since October, and the business contributed 0.4% to the 5.7% revenue growth.
"Growing internet and data revenues continued to offset a 4.1% fall in revenue from fixed-line voice. Revenue contribution from the fixed-line voice segment will continue to decline from 31% in 2014, " says Nidhi Dhruv, a Moody's Assistant Vice President and Analyst, and Lead Analyst for TMB.
Adjusted EBITDA margins decreased by around 0.4% to 39.0% in 2014, mainly due to higher bad debt as a result of tighter credit treatment policy, and the lower margin P1 business, even as direct costs were controlled.
Moody's expects TMB to maintain low-to-mid single-digit earnings growth over the next two years, supported by continued growth in broadband. Margin improvements are unlikely, however, given competitive pressure, and the consolidation of P1 which has lower EBITDA margins than TMB.
TMB's leverage -- as measured by adjusted debt to EBITDA -- was around 2.0x at the end of 2014, slightly below the 2.1x at the end of 2013, helped by the 5% year-on-year increase in adjusted EBITDA.
"We expect TMB's leverage to rise again over the next two years, however, given high capex, high shareholder returns, and continued margin pressure, although leverage will remain within our expectations for the rating level at 2.0-2.5x," adds Dhruv.
Adjusted free cash flow improved by around RM400 million year on year to around RM85 million, driven by solid operations. However, capex will likely remain elevated in the next few years largely on account of new HSBB2 and the Sub Urban Broadband (SUBB) projects announced earlier this week, which will see investment of up to RM3.4 billion over the next 10 years. However, a portion of the said projects' overall cost will be shared with the Malaysian government. The definitive terms and the co-investment by the government will only be made known upon conclusion of the agreement for the projects.
"Continued high capex and shareholder returns will result in TMB's cash flow metrics remaining inconsistent with the current A3 rating. However, perceived support from the Malaysian government and TMB's dominant market position continue to support the company's A3 rating," concludes Dhruv.
TMB's A3 rating is in line with its baseline credit assessment (BCA) of a3 and is based on its fundamental creditworthiness. TMB's rating outlook is positive, in line with the sovereign rating of Malaysia.
Upward rating action at the sovereign level could result in positive rating action for TMB, unless there is a major adverse change in its fundamental credit profile and relationship with the government. Upward rating pressure could also emerge from an improvement in free cash flow, resulting in adjusted FCF/debt consistently above 15-20%, and adjusted debt/EBITDA consistently below 2.0x.
Negative rating pressure is unlikely, given the positive outlook. However, the outlook could revert to stable if the outlook of the sovereign rating changes to stable, or if there is a major change in the company's relationship with the government.
In addition, the change in the outlook to stable could be considered if TMB's fundamental credit profile weakens due to the erosion of its dominant market positions, significant declines in its telecommunications revenue, or a significant increase or acceleration of its investment in the HSBB project. Such risks would be measured by adjusted retained cash flow (RCF)/debt falling 25-30%, or adjusted debt/EBITDA remaining above 2.5x on a consistent basis.
The methodologies used in this rating were Global Telecommunications Industry published in December 2010, and Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
TMB is the largest fixed line and broadband telecommunications operator in Malaysia. As of the end of 2014, it held approximately 98% of the fixed line market and 93% of the fixed broadband market by customers. TMB is 54.1% owned by parties affiliated with the Government of Malaysia.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
Nidhi Dhruv
Asst Vice President - Analyst
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore 48623
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