CELLCO CAPITAL BERHAD - 2023 |
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| Report ID | 60538900469652 | Popularity | 148 views 52 downloads | |||||
| Report Date | Dec 2023 | Product | ||||||
| Company / Issuer | Cellco Capital Bhd | Sector | Infrastructure & Utilities - Telecommunications | |||||
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| Rationale |
Rating action MARC Ratings 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 stands at RM500.0 million. Rationale Cellco is a special-purpose entity set up to raise funds via the Sukuk Ijarah Programme for its parent, Stealth Solutions Sdn Bhd (Stealth), an independent tower company and the originator of this transaction. It will purchase completed telecommunication towers from Stealth at prices equivalent to the proceeds from the sukuk issuance, concurrently leasing them back to Stealth for a predetermined lease period at an agreed rental amount that reflects the principal and profit portions of the sukuk. Issue 1 is backed by 531 operational telco towers. The ratings continue to benefit from long-term lease agreements with major telco players that provide strong visibility and stability to cash flow. The average remaining contract life is 8.2 years (excluding options to renew). The lease payments are fenced in designated accounts controlled by the security trustee. Since MARC Ratings’ last report, the number of towers and tenants have grown to 547 and 914 as at the end of June 2023 from 543 towers and 876 tenancies in the previous corresponding year. The tenancy ratio improved to 1.7x from 1.6x. Growth prospects for the tower industry remain strong given the increasing demand for data. This is reflected in the rolling out of 5G services, aimed at addressing coverage and capacity requirements, which will further boost tower demand for network densification. This will bode well for tower companies as providers of critical tower infrastructure. Around 30% of Stealth's rental revenue in 1H2023 came from U Mobile Sdn Bhd, while Digi.Com Berhad (Digi), Maxis Bhd, and Celcom Berhad (Celcom) contributed 20%, 18%, and 12%. Stealth’s high customer concentration is common in the oligopolistic telco industry, and MARC Ratings views the risk as mitigated by the strong market positions of these key customers. Non-renewal risk is assessed to be low considering that towers are mission-critical infrastructure for telcos, and the deterrent factor of high switching costs. Our assessment also takes into account Stealth's successful track record of retaining customers with relationships spanning over a decade. As of end-June 2023, only a small 2% of the company’s tenancy contracts are due for renewal between 2023-2024. The recent merger between Celcom and Digi to form CelcomDigi Berhad would have some impact on Stealth, as the merged entity eliminates redundant towers to consolidate its tower portfolio. However, MARC Ratings anticipates that any decline would be partially offset by tower demand from other telcos as they continue to densify their networks to increase coverage and capacity. Furthermore, tenancy from Digital Nasional Berhad (DNB) would also partly offset the potential non-renewal of tenancies affected by CelcomDigi’s network consolidation exercise. To date, DNB has awarded 93 sites to Stealth that would increase going forward as the rollout of 5G services accelerates. Stealth leases the sites on which its telco towers are located from third-party landowners. As the leases, typically on three-year terms, are shorter than the tower lease agreements, Stealth is exposed to the risk of the landowners not renewing the ground leases. This risk is largely mitigated by Stealth’s strong track record of lease renewals. Moreover, it has no significant concentration in a single landowner. MARC Ratings expects the company to maintain its strong liquidity position with ample covenant headroom. In MARC Ratings’ sensitised case which includes stresses on tenancy growth and operating margin, the average and minimum finance service cover ratios (FSCR) of 3.0x and 2.3x provide comfortable buffer above the covenanted 1.5x. Rating outlook The stable outlook reflects the underlying stability of Stealth’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
Key risks
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