Fitch Ratings has upgraded Indonesian operator Smartfren Telecom’s long-term rating to ‘CCC’ from ‘CC’ based on its continued EBITDA improvement as its subscriber base grows.
Smartfren expects to generate positive EBITDA in 2014 (its 1H14 EBITDA was IDR48 billion or $3.95 million) after sustaining negative EBITDA since 2008.
However, Fitch said the company’s liquidity position remains precarious: “The company will continue to rely on external sources of funding to meet its loan repayment and CAPEX needs and expects its EBITDA/interest coverage ratio will remain below 1.0x at least until 2015.”
Fitch expects consolidation among Indonesia’s CDMA operators within the next 12-18 months. Compared with the dominant GSM operators, Smartfren and Bakrie Telecom continue to struggle to gain meaningful market share and face liquidity problems at current tariff levels. Both companies are currently discussing a possible partnership to strengthen their market positions.
KT’s ARPU to rise
Meanwhile Fitch has affirmed KT’s ratings and stable outlook, which reflects its view that the company’s operations and credit metrics will improve from 2H14 despite recent deterioration stemming from higher marketing expenses and one-off costs related to an early retirement programme.
The 2Q14 voluntary early retirement programme helped KT reduce its headcount by 25 per cent and will cut labour costs by KRW400-500 billion ($376-470 million) a year.
Fitch expects KT’s profitability to improve as marketing costs fall. The agency said a new bill aimed at increasing the transparency of handset subsidies will help keep operators’ marketing expenses in check and allow them to concentrate more on customer retention.
KT’s ARPU is forecast to continue to rise in the medium term as its LTE subscriber base increases. But its fixed-line voice revenue will continue to decline.
With improved operating cash flow, lower CAPEX and dividend payments, Fitch predicts that KT will generate positive free cash flow from 2H14 and its core telecom leverage to fall to 2.0x or below in 2015-2016.
The agency said KT’s rating headroom is now low, with profit deterioration and higher debt levels largely due to higher marketing costs and one-off payments linked to the early retirement programme during the first half. “As such we expect core telecom net leverage to rise to 2.9x in 2014, above our guideline for a downgrade.”