CREDIT ANALYSIS REPORT

CELLCO CAPITAL BERHAD - 2022

Report ID 6053890047018 Popularity 1047 views 94 downloads 
Report Date Dec 2022 Product  
Company / Issuer Cellco Capital Bhd Sector Infrastructure & Utilities - Telecommunications
Price (RM)
Normal: RM500.00        
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Rationale
Rating action

MARC Ratings has affirmed its ratings of MARC-1IS /AAIS 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 RM500.0 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 benefit from long-term lease agreements with major telco players that provide strong visibility and stability to cash flow. Total revenue locked-in as at end-June 2022 was RM49.7 million p.a., and the average remaining contract life was 9.2 years (excluding options to renew). The lease payments are fenced in designated accounts controlled by the security trustee. Collections have remained good to date, with average receivable days of 16 days as at end-September 2022.

We view non-renewal risk as low, as towers are mission-critical infrastructure for telcos, and also considering the deterrent factor of high switching costs. Our assessment also considers Stealth’s good track record of customer retention as the clients have recurring relationships of at least 10 years. As at end-June 2022, only a small 2% of Stealth’s tenancy contracts are up for renewal during 2022-2024. 

We see strong prospects for the tower industry. Rising data demand will spur telcos to seek expansion and strengthening of their networks, and the rolling out of 5G services to address coverage and capacity needs will also drive the requirement to densify networks. This will bode well for tower companies as providers of critical tower infrastructure. For Stealth, its lease contracts had grown at an average of 14% a year 

during 2017-1H2022. The tenancy ratio improved to 1.61x as at end-June 2022 on additional tenants, up from 1.55x in 2021 and 1.50x in 2020. We look at the increased tenancy ratio or co-locations positively, as this could support margin improvement through economies of scale.

Around 32.6% of Stealth’s 1H2022 rental revenue came from U Mobile Sdn Bhd, while DiGi.Com Bhd (Digi), Maxis Bhd and Celcom Axiata Bhd (Celcom) contributed 20.5%, 19.6% and 12.7%. While the high dependency of revenue on a few parties creates customer concentration risk, we do not view this as a key concern considering the oligopolistic nature of the domestic telco industry and the strong market position of these four main customers. Furthermore, the revenue is contractually secured based on long-term agreements. With the addition of Digital Nasional Berhad (DNB), a new tenant from 2021, we also expect client concentration to reduce over time. From 2021 to 1H2022, Stealth’s lease contracts with DNB have increased from 22 to 68, and are likely to increase further, as the deployment of 5G gathers pace. 

Stealth leases the sites where 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.

In terms of cash flow, Cellco projects a strong liquidity position with ample covenant headroom. Our sensitised case includes stresses to revenue growth and operating margin, resulting in a minimum finance service cover ratio (FSCR) of 3.2x in 2029, still well above the covenanted 1.5x. We note the comfortable margin is partly due to a large cash cushion from a portion of the sukuk proceeds. There could be a requirement in the future for capex, although there are no plans at this time. Nevertheless, we expect the FSCR to be maintained above 2.0x, in line with its current ratings. 
 
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
  • High cash flow visibility from long-term lease contracts
  • Continued tower, tenancy growth 
  • Long-term growth opportunities
  • Structural protection through ring-fencing of lease payments in designated accounts

Key risks
  • Contract renewal risk
  • Site lease renewal risk

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