MARC has affirmed its rating on Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme of AA+_IS. The outlook has been revised to negative from stable.

CNSB provides network telecommunication services to its parent, Celcom Axiata Berhad (Celcom), through network telecommunication assets. The rating and outlook are premised on the overall credit profile of Celcom group given the financial and operational linkages within the group. This approach is supported by the letter of support from Celcom to maintain 100% direct or indirect equity interest in CNSB throughout the sukuk tenure.

The outlook revision reflects MARC’s concerns over Celcom’s weakening margins resulting from heightened competition and the potential increase in borrowings to address regulatory requirements for spectrum fees and capital expenditure (capex) that may impact the group’s financial performance. The affirmed rating considers Celcom’s strong market position in the telco industry despite a decline in its subscriber base, its longstanding operational track record and strong cash flow generation.

At end-2Q2016, Celcom’s subscriber base stood at 11.2 million, down from 12.2 million as at end-2015. In addition to the impact from the intense competition in the domestic telco market and stagnant end-user growth, Celcom’s subscriber base growth was also affected by an internal exercise to clean up non-active subscribers. Celcom’s current challenges have been compounded by the recent regulatory change involving a spectrum reallocation that is expected to disadvantage larger telco operators in favour of smaller players. MARC views that pressure on Celcom would increase to provide more value to its telco services in order to maintain its market position; these efforts tend to be capital intensive.

Celcom’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin declined to 39.6% in 2015, the lowest since 2011’s 44.0%. The decline is partly due to lower average revenue per user (ARPU) which fell from RM50 in 2011 to RM43 in 2015 in the face of aggressive competition. MARC views the continued declining trend in ARPU could persist given the increasing prevalence of data services as a substitute for voice and SMS services. Celcom has embarked on cost-control strategies to address its declining margins; these include sharing base transmission stations with its peers and entering into a series of collaboration agreements with Telekom Malaysia Berhad for network sharing and volume discount on lease arrangements in 2016.

Cash flow from operations (CFO), which averaged RM2.1 billion from 2013 to 2015, has remained strong. Despite posting a lower pre-tax profit of RM1.9 billion (2014: RM2.3 billion), Celcom registered a higher CFO of RM2.2 billion in 2015 (2014: RM1.5 billion) due largely to net changes in related company balances of RM171.4 million. Celcom has recorded its first positive free cash flow (FCF) since 2011 on the back of lower dividend payment of RM1.1 billion in 2015 (2014: RM2.9 billion). However, its shareholders’ funds position remained negative as at end-2015. As at December 31, 2015, Celcom’s outstanding sukuk stood at RM4.5 billion, of which RM1 billion is due for redemption by August 2017.

MARC views the group’s liquidity to remain challenging given the spectrum fee outlays and higher capex spending. Following the spectrum reallocation in 2016, Celcom is expected to pay RM817 million in spectrum fees by November 2016. Its capex is expected to average at RM1.4 billion per annum from 2016 to 2018 vis-à-vis an average of RM0.9 billion per annum from 2013 to 2015. The telco intends to fund its capex through internally generated funds and the spectrum fees through borrowings. However, at the current rating level, Celcom has limited headroom to further increase its leverage to fund its capex. Given the elevated capex requirement and spectrum fee outlays, MARC expects Celcom to moderate its dividend upstream to the parent company, Axiata Group Berhad, over the next two years.

The negative outlook reflects the risk of Celcom’s rating being lowered if its financial metrics worsen significantly from current levels, in particular its EBITDA margins that should remain above 30% and adjusted cash over debt ratio above 45%. The rating agency may revert the rating outlook to stable if Celcom is able to contain its financial metrics within the current rating band on the back of supportive operating performance.

Contact:
David Lee, +603-2082 2255/ david@marc.com.my.