MARC Ratings has affirmed its AA+_IS rating on EDOTCO Malaysia Sdn Bhd’s Islamic Medium-Term Notes Programme (Sukuk Wakalah Programme) of up to RM3.0 billion with a stable outlook. The current outstanding stands at RM1.4 billion.

The rating continues to be driven by the solid market position of EDOTCO Malaysia and its subsidiaries (collectively EDOTCO Malaysia group) in the domestic telecommunication (telco) tower industry, the underlying stability of its business model that provides strong cash flow visibility, and the low operational and counterparty risks. The rating also considers the strong upside potential for EDOTCO Malaysia group as the country’s largest tower company (towerco) to be able to capitalise on the growing demand for broadband services and the push for national digital connectivity. 

During the review period, MARC Ratings notes that the group has gained a stronger foothold in the domestic towerco industry, with 6,117 towers, 14,061 tenancies, and an estimated 22% share of the market as of end-June 2023 (end-June 2022: 6,081 towers, 13,029 tenancies and 19% market share). MARC Ratings believes that, as a market leader, the group is well-positioned to capitalise on the rising demand for data and the rollout of the country’s 5G services. 

Given the nature of the industry, EDOTCO Malaysia group is exposed to client concentration risk, with an associated telco contributing to about 58% of total rental revenue in 1H2023; this risk is significantly mitigated by the strong business profile of the related company. The rating agency continues to view non-renewal risk as low considering the mission-critical nature of tower services to telcos and the high switching costs involved. These risks are further mitigated by the long-term lease contracts and longstanding relationships that EDOTCO Malaysia group has with the telcos. As at end-June 2023, the bulk of the group’s contracts (about 38%) are up for renewal in 2028. 

 

The recent merger between Celcom Berhad and Digi.Com Berhad to form CelcomDigi Berhad will have some impact on EDOTCO Malaysia group, as the merged entity consolidates its tower portfolio by eliminating redundant towers. However, the rating agency anticipates that any decline would be offset by tower demand from other telcos as they continue to densify their networks to increase coverage and capacity. Furthermore, tenancy demand from Digital Nasional Berhad (DNB) would also partly offset the potential impact from CelcomDigi’s network integration. DNB has awarded a number of sites to EDOTCO Malaysia group under both Phase 1 and Phase 2 of the country’s 5G rollout and is expected to increase as the rollout of 5G gathers pace. MARC Ratings notes that contributions from other telcos have steadily increased from 25% in 2019 to 42% as of June 2023, particularly with the addition of DNB since 2021.    

The group’s liquidity profile is characterised by strong cash flow from operations (CFO), exceeding RM400 million annually between 2019 and 2021, and is projected to remain at this level through 2027. (The exception in 2022 when CFO rose to RM577.1 million was due to the acquisition of Touch Mindscape Sdn Bhd (Touch) in December 2021.) The projected CFO is sufficient to cover annual planned capex, ranging from RM53 million to RM97 million, and dividends from RM160 million to RM200 million over the next five years.

Debt-to-equity (DE) ratio has improved to 1.4x as at end-June 2023 (end-2021: 1.8x) following the settlement of most of its short-term borrowings in 2022 and increase in equity base. Borrowings are expected to decline over the medium term with scheduled repayments of its sukuk of RM100 million in 2025 and RM600 million in 2027. Overall, MARC Ratings expects the group’s strong cash-generative business model to support further leverage improvement. 

The stable outlook reflects the rating agency’s expectation that EDOTCO Malaysia group will sustain its strong cash flow generation while maintaining its credit profile broadly in line with the rating band. 

While no rating upgrade is envisaged in the near term, a positive rating action could stem from a sustained improvement in credit profile over the longer term.

The rating and/or outlook could be revised downwards if financial performance were to deteriorate sharply from expectations and/or if undertaking of any debt-funded acquisitions were to weaken credit metrics.