MARC Ratings has affirmed its AA_+IS rating on Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme with a stable outlook. As at end-October 2022, the outstanding amount stood at RM1.15 billion.  

CNSB provides network telecommunications services to Celcom Axiata Berhad (Celcom) group. In assessing CNSB, we have considered the overall credit profile of Celcom based on the strong financial and operational linkages of entities within the group. Celcom has also given its undertaking to maintain its 100% direct or indirect ownership of CNSB throughout the sukuk tenure. 

In November 2022, Celcom and Digi.com Berhad (Digi) completed their merger to form Malaysia’s largest mobile operator with an estimated subscriber market share of about 42%. We view the merger as broadly positive, which may support a higher rating. However, this will depend on our further assessment of the possible execution and integration risks from the merger, and the strategic direction of the enlarged entity and its post-merger financial policies. At this juncture, Celcom and Digi remain operationally and financially independent and we have, therefore, assessed Celcom as a standalone entity. 

In October 2022, Celcom completed a share subscription agreement (SSA) to take up a 12.5% equity interest in Digital Nasional Berhad (DNB). The equity participation in DNB, estimated to cost RM179 million, will be internally funded. As at end-June 2022, Celcom had cash of RM1.8 billion, more than sufficient to cover the investment. Celcom has also signed an access agreement with DNB to lease the latter’s 5G network for 10 years from October 7, 2022, to October 6, 2032.

Celcom’s subscriber base has steadily grown, expanding 11% in 2021 and 3% in 1H2022. Growth was partly driven by the uptake of convergent products  as well as competitively priced and data-centric plans being offered. Continued investment in infrastructure to improve network quality and coverage as well as drive better customer experience also helped growth. Celcom’s share of the domestic telco industry by number of subscriptions as at 1Q2022 stood at 21%. Growth prospects are likely to remain good, underpinned by a firm economic recovery, the reopening of borders from April 2022, and the wider coverage under the Jalinan Digital Negara (JENDELA) initiative. 

In 1H2022, Celcom’s blended average revenue per user (ARPU) dropped slightly further to RM44/month, which may be attributable to low roaming revenue due to pandemic-linked travel restrictions, and the dilution effect from more postpaid subscribers opting for entry-level postpaid plans. Competitive intensity and pricing pressure also impacted ARPU. However, the rise in Celcom’s subscriber base has continued to outpace the decline in ARPU, driving up revenue to RM6.6 billion in 2021 (+6.5% y-o-y) and to RM3.3 billion in 1H2022 (+2% y-o-y). Profitability has also shown good improvement, with 2021 operating profit up 23% to RM1.48 billion. Celcom’s operating profit before interest, tax, depreciation and amortisation (OPBITDA) margin has also widened to 45.1% in 1H2022 from 42.8% in 2021 and 41.5% in 2020 on higher revenue and cost rationalisation efforts.

Celcom maintains a strong liquidity position, underpinned by robust operating cash flow (CFO) generation and ample cash balances. Supported by stronger bottom line performance, CFO rose to RM2.9 billion in 2021 (2020: RM2.0 billion), translating into comfortable interest and debt coverages of 15.1x and 0.6x as at end-2021 (2020: 13.8x and 0.5x). As regards borrowings, Celcom’s total debt has eased from RM4.7 billion as at end-2020 to RM4.0 billion as at end-October 2022 on the back of scheduled repayments of outstanding debt.

The stable outlook reflects MARC Ratings’ expectation of Celcom maintaining its market position and financial performance, as well as a prudent capex programme and dividend distribution policy. 

Any upgrade will take into consideration a sustained improvement in profitability, cash flow generation and overall financial profile. 

Any significant weakening in credit profile arising from, inter alia, loss of market share, lower ARPU, sharp increases in borrowings and/or aggressive dividend distribution, could pressure the rating and/or outlook.