Celcom Transmission (M) Sdn Bhd - 2012

MARC has assigned a rating of AAAIS with a stable outlook to Celcom Transmission (M) Sdn Bhd's (CTX) RM5.0 billion nominal value Sukuk Programme. Proceeds from the sukuk offering will be largely used to retire existing debt of RM4.2 billion. CTX is a core subsidiary of the Celcom Axiata Berhad (Celcom) Group, Malaysia's second largest wireless service provider.

The rating reflects the credit strength of the overall consolidated entity, premised on the significant financial and operational links between CTX, the parent company Celcom and fellow subsidiary Celcom Mobile Sdn Bhd (CMSB). CTX is the owner of Celcom Group's network assets and its main borrowing entity. Under this rating approach, all three entities are assessed as having the same level of default risk. Additionally, the sukuk benefits from a letter of support from Celcom which commits the holding company to holding directly or indirectly a 100% equity interest in CTX, and MARC opines that the aforementioned letter would ensure that CTX maintains a financially prudent posture. The letter of support reinforces the likelihood of inter-company support to CTX in the event of stress, although it does not constitute a legal guarantee, and accordingly does not provide the same degree of support certainty as a guarantee.

Key credit strengths relate to the Celcom Group's relative market strength, supported by good mobile network coverage, capacity and quality. This has allowed Celcom Group to sustain strong margins and continues to provide a platform for sustainable earnings and cash flow, and resilient cash flow generation even during a tougher economic climate. Other key factors influencing the rating and outlook are the trend towards substitution of traditional voice and SMS services with data services and private social networks, the strategic and financial risks relating to Celcom's plans to grow data revenue, and the sizeable ongoing capital investments to maintain its competitive strengths in service and coverage levels. The rating also recognises the fairly recent material increase in group indebtedness and its high dividend payouts in 2009 and 2010. While the increase in the Celcom Group's financial leverage is balanced to a meaningful extent by improvement in its free cash flow generation and manageable debt maturity profile, negative pressure could be exerted on the rating if the group's ability to generate cash flow materially weakens, or if there is evidence of a sustained trend of substantial shareholder distributions. 

Celcom is the second largest player by revenue in the domestic mobile market with a subscriber base of around 12 million customers and leading positions in mobile broadband and enterprise segments. Of the three incumbent mobile operators, Celcom currently has the highest number of mobile broadband subscribers at 947,000 as at end-March 2012. In common with other key players in the domestic mobile market, Celcom's primary challenge is to counter flat or declining demand for the traditional cash cows of voice and SMS services by successfully monetising the growing demand for mobile data while optimising its use of network resources. A key risk facing mobile operators is that of not being able to fully monetise data traffic, and the corresponding threat of declining revenues and narrower margins due to higher network investments to cope with the high growth in data traffic. Accordingly, MARC believes that the key strategic actions taken by Celcom to address the challenge of sustaining pricing power and revenue streams, and their effectiveness will be an important credit driver for Celcom Group going forward. These notably include promotions to increase the usage of voice services, data and smartphone bundling programmes to stimulate the demand for non-voice service, and investments to prepare its network to support fourth generation broadband services.

Celcom Group’s operating profit margins have been sustained above 30.0% during the past three financial years with a three-year average operating margin of 32.7% in spite of the mature domestic mobile market and intense competition. Celcom Group has reported sustained increases in revenue of 5.6% and 7.5% in 2011 and 2010 respectively; however, its pre-tax profit decreased to RM2.18 billion in 2011 from RM2.28 billion the year before, on account of higher promotion costs, content charges, inventory costs and financing costs.  Celcom Group’s free cash flow (FCF) coverage of debt rose to 39.6% with improved cash flow retention due to the absence of dividend payments in 2011. The Celcom Group’s solid FCF generation capacity currently accommodates its fairly high debt leverage; its debt-to-equity ratio was 6.4 times as at end-2011.

Celcom Group had robust cash balances of RM3.5 billion on a consolidated basis as at end-2011. MARC expects Celcom Group’s centralised treasury function, which manages the group’s funding needs, to ensure that the group’s liquidity is prudently managed to address its capital spending and debt service requirements. MARC expects Celcom Group to generate sufficient cash flow to support its capital investments which are projected to be in a range of RM800 million to RM1.0 billion annually, and to reduce its debt burden over time. On a related note, the rating agency observed large dividend payouts in the two immediately preceding years to its parent, Axiata Group Berhad (Axiata), which collectively amounted to RM8.6 billion. Celcom Group constitutes 20.8% of the Axiata’s assets and is its major dividend contributor. MARC opines that continued large upstream dividend distributions to Axiata to fund Axiata’s debt repayments and dividend payments will reduce Celcom’s ability to internally generate new capital for future business growth and exert pressure on its credit metrics.

The stable outlook reflects MARC’s expectation that Celcom Group’s consolidated financial metrics will remain comfortably positioned within the AAA rating category over the near to intermediate term. Negative rating pressure could surface from a reduction in CTX’s strategic importance to the Celcom Group which would require the rating to reflect the former’s standalone financial metrics, increased exposure to parent credit risk which may require the rating to be brought more in line with Axiata’s, and/or a material deterioration in Celcom Group’s consolidated financial metrics.

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