CREDIT ANALYSIS REPORT

CELLCO CAPITAL BERHAD - 2021

Report ID 60538900440 Popularity 1082 views 102 downloads 
Report Date Dec 2021 Product  
Company / Issuer Cellco Capital Bhd Sector Infrastructure & Utilities - Telecommunications
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed its MARC-1IS /AAIS  ratings on Cellco Capital Berhad’s (Cellco) RM520 million Issue 1 issued under its Islamic Commercial Papers/Islamic Medium-Term Notes (Sukuk Ijarah Programme) with a combined limit of up to RM1.0 billion. The ratings outlook is stable. Any further drawdown under the programme will require a re-assessment of the ratings. As of date, the outstanding currently stands at RM500 million following the redemption of ICP of RM20 million in June 2021. 

Rationale     
Cellco is a special-purpose entity that was set up to raise funds via the Sukuk Ijarah Programme for its parent, Stealth Solutions Sdn Bhd (Stealth), an independent tower company. In exchange, Stealth injected its 531 operational telco towers to Cellco, lease payments from which will meet the financial obligations under the sukuk. 

The ratings affirmation is mainly driven by Cellco’s strong cash flow visibility with a locked-in contracted revenue of about RM48 million p.a. from the lease payments. The lease payments are ring-fenced in designated accounts controlled by the security trustee. The weighted-average contract maturity of around eight years (excluding options to renew) provides stability of income stream over the long term. We consider renewal risk to be low considering the creditworthiness of the counterparties — Maxis Berhad, Celcom (Malaysia) Berhad, Digi Telecommunications Berhad and U Mobile Sdn Bhd — and the long-standing relationships with the telcos of at least 10 years. 

However, embedded in the tower lease agreements are lower rentals on contract renewals; about 1% of its contracts will be due for renewal in 2022-2023. Nevertheless, Cellco’s cash flow would be bolstered by new leasing opportunities as telcos continue to densify their networks to increase speed and capacity to meet the rapidly growing data demand. Investments in 5G, the increasing prevalence of infrastructure sharing to reduce duplicating capex, and telcos’ preference for independent tower providers in order to be asset-light, are some of the factors that would be supportive of the overall growth in the tower industry. The favourable industry characteristics will likely drive addition of new tenants to Cellco’s existing towers and increase its revenue and cash flow without material incremental costs. As at end-June 2021, tenancy ratio of the 531 towers remained stable at 1.51x (2020: 1.50x). 

With regard to the client concentration of the overall tenancies, four out of six clients contribute about 90% of rental income in 1H2021, reflective of the oligopoly of the domestic telco industry. We view concentration risk to be manageable given the well-established client relationships and high switching costs, particularly arising from operational factors.

In terms of cash flow, Cellco projects a strong liquidity position with ample covenant headroom. Our sensitised case has assumed a low 1% y-o-y tenancy growth and a 20% increase in operating expenses. Under this scenario, average and minimum finance service cover ratios (FSCR) are projected at about 5.5x and 3.1x, well above the minimum covenanted 1.5x. The strong FSCRs are attributable in part to a large cash cushion from a portion of the sukuk proceeds. There could be needs in the future for capex and working capital, although no plans have been confirmed at this time. Nevertheless, we expect the FSCR to be maintained above 2.0x, commensurate with its current ratings. 

Its parent, Stealth, is a critical passive infrastructure provider for telcos and therefore carries minimal risk related to technology or tower obsolescence. We note that Stealth leases all the properties where its site infrastructure is located, typically on three-year lease terms. These are shorter than the tower lease agreements, which may expose Stealth to the risk of the landowners not renewing the ground leases. However, Stealth’s strong track record in operations with a successful history of site lease renewals and the absence of concentration in a single landowner mitigates this risk.

Rating outlook     
The stable outlook reflects the underlying stability of Cellco’s business model, underpinned by timely lease payments from long-term contracts with clients that are typically 5-10 years in initial length. It also incorporates the potential for revenue and cash flow growth given the favourable industry outlook. 

Rating trajectory

Upside scenario     
Although a rating upgrade is not anticipated in the near term, a higher-than-projected tenancy growth leading to solid improvements in revenue and cash flow metrics on a sustained basis would be credit positive. 

Downside scenario
A sustained decline in cash flow that has the impact of impairing Cellco’s capacity to meet its debt service obligations from unexpected adverse developments, such as cessation of tower lease contracts, could lead to a downgrade. 

 Key strengths
Cash flow visibility from long-term lease contracts with moderate and strong counterparties
Structural protection through ring-fencing of lease payments in designated accounts
 
Key risks
Contract renewal risk
Site lease renewal risk


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