MARC has lowered the rating of Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme to AA+_IS from AAA_IS. The outlook is revised to stable from negative. CNSB provides network telco services to Celcom Axiata Berhad (Celcom) through network telco assets that it acquired from the parent in an earlier internal reorganisation. Given the financial and operational links between both entities, the ratings and outlook are premised on the overall credit profile of the Celcom group. The rating approach is also supported by an undertaking from Celcom to maintain 100% ownership in CNSB throughout the sukuk tenure.

The rating action was primarily driven by weakening cash protection measures of the Celcom group arising from an aggressive dividend distribution policy that saw an increase in dividend payout to RM2.9 billion in 2014 from RM2.3 billion in 2013. MARC understands that the incremental dividend payout follows Celcom’s sale of edotco Malaysia Sdn Bhd (edotco Malaysia) to edotco Group Sdn Bhd, a specialised tower managing subsidiary of Axiata Group Berhad (Axiata). The payout contributed to a larger free cash flow deficit of RM2.3 billion (2013: negative RM152.7 million) and a further widening of its negative shareholders’ equity to RM1.1 billion (2013: negative RM850 million). MARC views the consistently sizeable dividend distributions to the ultimate parent, Axiata, would constrain the Celcom group’s strategy by limiting its financial autonomy and potentially exposing the group to its parent’s credit risk. These factors notwithstanding, the ratings incorporate Celcom’s leading domestic position in the telco industry and its continued strong cash flow generation that are supportive of annual capital expenditure requirement and debt obligations.

For 2014, Celcom registered a 3.6% y-o-y decline in revenue to RM7.7 billion (2013:RM7.9 billion) on a decline, albeit marginal, in subscriber base and lower mobile revenue. Its subscriber base fell to 13.0 million from 13.1 million from end-2013 but remains the largest among telco operators in Malaysia. Domestic telco players continued to face a tough operating environment, beset by declining trends in average revenue per user (ARPU) and minutes of usage (MOU). Celcom’s blended ARPU stood at RM46 as at end-2014, down from RM52 five years ago; blended MOU stood at 213 minutes for the same period compared to 231 minutes at end-2013. The impact from the decline in mobile revenue was mitigated by increased contribution from mobile data to 30% (2013: 25%).

Since the last rating review, Celcom undertook an internal restructuring exercise through the sale of edotco Malaysia. The sale enabled Celcom to realise a RM1.0 billion gain, boosting its operating profit to RM3.4 billion (2013: RM2.6 billion); excluding this disposal gain its adjusted operating profit was 9.8% lower y-o-y at RM2.4 billion and the operating profit margin stood at 31.1% (2013: 33.2%). MARC believes that the Celcom’s profitability, along with other telco operators, could come under further pressure from over-the-top applications substituting voice and SMS. In this regard, entering into collaborative arrangements, employing new technologies and implementing cost control measures are critical to support profitability.

The bandwidth network sharing agreement entered into with Telekom Malaysia Berhad in November 2013 has helped Celcom to manage rising network costs while addressing the increase in data demand. At the same time, Celcom is optimising its network coverage through partnerships and spectrum-sharing with multiple mobile virtual network operators, including a 10-year network collaborative deal with DiGi Telecommunications Sdn Bhd. MARC also notes Celcom’s collaboration with SK Telecom Co Ltd to launch an online marketplace to pursue business opportunities in the domestic digital ecosystem. To better manage its business processes, Celcom has also undertaken an IT integration project to improve its inventory and customer relations management.

Despite headwinds facing the industry, Celcom has maintained a comfortable level of profitability with an adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 41.3% (2013: 43.6%) while keeping its adjusted debt-to-EBITDA ratio at 1.6x (2013: 1.5x). MARC notes large advances totalling RM1.1 billion made to Axiata and related companies in 2014 have resulted in Celcom’s operating cash flow (CFO) declining to RM1.5 billion (2013: RM2.7 billion). These advances were undertaken to better manage the subsidiary’s cash reserves at the holding company level’s treasury division. Nonetheless, CFO remains adequate to cover the company’s annual capex requirement of around RM1.0 billion (2014: RM787 million). Cash balances declined to RM2.0 billion (2013: RM3.3 billion) after a net cash outflow of RM1.3 billion at end-2014. Despite Celcom’s strong cash flow generation capacity, MARC opines that Celcom would need to balance its sizeable dividend payouts against its large recurring capex requirement and substantial repayment obligations over the next five years.

The stable outlook reflects MARC’s expectation that Celcom will maintain its leading market position in the country and sustain its operating track record and consolidated financial metrics at current levels. MARC expects Celcom to maintain its debt-to-EBITDA ratio at below 2.0x and its EBITDA margin at above 30.0% going forward, in line with MARC’s corporate debt ratings methodology.

Contacts:
Nicola Tan, +603-2082 2262/ nicola@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.