CREDIT ANALYSIS REPORT

EDOTCO MALAYSIA SDN BHD - 2022

Report ID 6053890046828 Popularity 95 views 42 downloads 
Report Date Jul 2022 Product  
Company / Issuer Edotco Malaysia Sdn Bhd Sector Infrastructure & Utilities - Telecommunications
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Rationale
Rating action

MARC Ratings has assigned a preliminary rating of AA+IS to edotco Malaysia Sdn Bhd’s proposed Islamic Medium-Term Notes Programme (Sukuk Wakalah Programme) of up to RM3.0 billion with a stable outlook. 

Rationale 

The assigned rating is primarily driven by edotco Malaysia’s solid market position in the domestic telecommunication (telco) tower industry as the country’s largest tower company (towerco), the underlying stability of edotco Malaysia’s business model that provides strong cash flow visibility, and the low operational and counterparty risks. The rating also incorporates the telco tower industry’s strong growth potential on the back of growing demand for broadband services and the accelerated push for national digital connectivity. 

Indirectly majority-owned by Axiata Group Berhad, edotco Malaysia and its subsidiaries (edotco Malaysia Group) boasts 6,046 towers with 12,984 tenancies, providing a 20% domestic share of the tower market as of end-March 2022. edotco Malaysia has further strengthened its market position with the RM1.7 billion acquisition of Touch Mindscape Sdn Bhd (Touch) in December 2021 whose 934 tenanted towers has added scale and new growth markets, particularly in Pahang where edotco Malaysia had limited prior presence. edotco Malaysia has also gained Touch’s over 500km of fibre trunk network in the country through the acquisition. MARC Ratings views positively the long-term prospects in the telco tower industry in which edotco Malaysia is well positioned to benefit given its size and scale. Rapid data growth and the implementation of new technologies as well as the development of 5G will remain supportive of tower demand. As of June 2022, the company has secured several 5G sites with Digital Nasional Berhad (DNB) under the latter’s Phase 1A and Phase 1B deployment plans. 

Also positively factored into the rating is edotco Malaysia Group’s stable business model with strong cash flow visibility. The company benefits from long-term lease agreements with its customers that are typically 10 years in initial length. These lease agreements mitigate volume and price risks. In our assessment, edotco Malaysia Group’s revenue for the 2022-2026 period would be between RM843 million and RM882 million p.a. based on its 12,984 tenancies as of end-March 2022, which includes Touch’s 2,534 tenancies. Assuming a 70% earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin, edotco Malaysia Group would generate EBITDA of around RM590 million to RM620 million p.a., which would provide a comfortable debt-to-EBITDA ratio of about 2.5x (based on the current RM1.6 billion debt level). 

MARC Ratings views edotco Malaysia Group’s operating risk of telco towers as low; the telcos will deploy the radio base stations, antenna equipment and its related electronics in the towers, while edotco Malaysia is responsible for the physical sites. This clearly provides strong visibility over opex and capex on tower maintenance. In terms of client concentration, one related telco accounted for about 71% of edotco Malaysia Group’s total revenue in 2021 including from infrastructure leasing, managed services and other services. In our assessment, we have given low weightage to concentration risk given the oligopolistic nature of the telco industry, notwithstanding the customer’s strong market position and the deterrent factor of high switching costs. We, nonetheless, note that contribution from other major telcos rose to 29% of total revenue in 2021, up from 13% in 2017. Overall, the strong credit quality of the counterparties is credit positive to edotco Malaysia Group. 

In terms of lease agreement renewal risk, about 40% of the lease agreement of its top five customers are up for renewal in 2028. However, we assess non-renewal risk to be low given tower operations are mission-critical infrastructure for telcos; this assessment also considers the long-term nature of the lease agreements and the long standing relationships of more than nine years with the Malaysian telcos. 

MARC Ratings notes that edotco Malaysia has historically demonstrated a conservative financial profile with zero borrowings prior to 2021. edotco Malaysia Group’s debt outstanding of RM1.6 billion as at end-2021 was related to the tower purchase and acquisition of Touch. Proceeds from the first issuance of up to RM1.4 billion under the proposed Sukuk Wakalah Programme will be used to refinance its borrowings. Over the medium term, edotco Malaysia Group projects to invest around RM144 million (in 2022) and an average of RM100 million p.a. over 2023 to 2027 with a forecast of telco tower growth of about 5% y-o-y during the period. The outflows are expected to be internally funded. Total debt, therefore, is not expected to exceed RM1.5 billion over the 2023-2027 period for its organic requirements. Given edotco Malaysia Group’s solid operating cash flow generation, its strong credit metrics and deleveraging capacity, we view this level of debt as manageable.

Rating outlook

The stable outlook reflects our expectation that edotco Malaysia Group will sustain its strong cash flow generation while maintaining its credit profile broadly in line with the rating band. 

Rating trajectory

Upside scenario

No rating upgrade is envisaged in the near term. Any upgrade would be led by a sustained improvement in credit profile. 

Downside scenario

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.

Key strengths
Largest tower company in Malaysia
Low operational risk 
Low counterparty risk
Strong cash flow visibility and healthy profitability metrics 
Long-term growth opportunities

Key risks
Land lease risk
Contract renewal risk


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