S&P and Moody's affirm ratings, outlook for Axiata

PETALING JAYA: S&P Global Ratings and Moody’s Investors Service have both affirmed their ratings and outlook on Malaysia-based wireless services provider Axiata Group Bhd, following the company’s acquisition of tower assets from Pakistan Mobile Communications Ltd (Jazz) for US$940 million (RM4 billion).
“We expect the tower assets to be earning before interest tax depreciation and amortisation (ebitda)-accretive and neutral to our leverage expectations for Axiata in 2018 and beyond. We estimate the company’s pro forma ratio of debt to ebitda to be 1.9x in 2018, slightly better than our downgrade trigger of 2.0x. However, we believe the rating headroom remains limited with no scope for significant debt-fuelled acquisitions or material shareholder distributions,” S& P said in a note published last Thursday. It has a BBB+ rating and stable outlook on Axiata.
It said although the acquisition increases the share of revenue from higher-risk economies for the group, it believes tower assets are a passive infrastructure play and should provide a steady stream of income.
“We also expect the prospects for tower companies in Pakistan to improve because telecom incumbents are increasingly looking at tower-sharing arrangements to optimise costs,” S&P said.
It believes Axiata will continue to seek opportunities to augment its tower assets, within its stated debt tolerance levels of a ratio of gross debt to ebitda of 2.5 times.
Moody’s on the other hand expects the acquisition to be immediately ebitda accretive, providing an uplift of around 6-7% to Axiata’s audited and reported consolidated revenue and ebitda for year-end 2016, according to management. It has a Baa2 rating and stable outlook o the group.
“Axiata has also announced that there will be no change to its dividend policy, which – when combined with a substantially debt-financed acquisition – continues to point to an aggressive financial policy. Still, we expect the group will remain prudent in balancing its shareholder initiatives and debt-holder protection measures, and remain committed to maintaining reported leverage at or below 2.3x,” says Annalisa DiChiara, a Moody’s vice-president and senior credit officer.
Moody’s expects Axiata’s revenue for 2016-2017 to grow by mid-single-digit percentages, supported by the steady performance of XL Axiata Tbk (PT) (Ba1 positive) in Indonesia, as well as continued solid growth at Robi Axiata Ltd in Bangladesh and Dialog Axiata PLC in Sri Lanka. This will help offset the weaker operating performance of Celcom, stemming from intense competition in Malaysia.
Moody’s also expects Axiata’s cash flows to stay strained in the next one to two years, reflecting the company’s progressive dividend payout policy and elevated capital expenditure (capex). Capex is likely to increase to around RM6.6-RM7.0 billion in 2017, as the company upgrades its network.
However, stable earnings from diversified revenue sources, solid market positions and strong relationships with the government of Malaysia (A3, stable) will continue to support its rating.
Moody’s said downward pressure could arise should competition intensify further in any of its key markets, such that its key subsidiaries report materially declining margins or borrow aggressively to fund capex or additional acquisitions, resulting in consolidated adjusted debt/ebitda remaining above 2.5-3.0x over the next six to 12 months.
The rating may experience upward pressure, should Axiata’s fundamental credit profile continue to strengthen, particularly if Axiata reduces its consolidated adjusted debt/ebitda below 2.0x and increases retained cash flow/debt above 35-40%.