Posted Date: January 15, 2020

MARC has affirmed its AA+IS rating on Celcom Networks Sdn Bhd’s (CNSB) RM5.0 billion Sukuk Murabahah Programme with a stable outlook.

CNSB, a wholly-owned subsidiary of Celcom Axiata Berhad (Celcom), provides network telecommunication services to its parent. In assessing CNSB’s rating, MARC considers the overall credit profile of the Celcom group given the financial and operational linkages within the group. The assessment is also underpinned by a letter of support from Celcom to maintain a 100% direct or indirect equity interest in CNSB throughout the sukuk tenure.

The rating affirmation reflects Celcom’s stable credit profile and operating performance. Despite rising competition, Celcom has recorded a steady operating profit before interest, tax, depreciation and amortisation (OPBITDA) margin in line with the rating band. The rating and the stable outlook incorporate MARC’s expectation that Celcom will continue to maintain a prudent capex programme and moderate shareholder distribution.

Celcom has established a strong position in the domestic telco industry. Notwithstanding a decline in its share of the subscriber base to 20% as at 2018 and end-June 2019 (2017: 22%), Celcom’s share of the industry revenue has remained strong. In 2018, it managed to capture a bigger slice of the industry’s growing revenue with an approximately 27% share (2017: 26%). This was on its higher ARPU (average revenue per user), which has steadily increased from RM41/month in 2016 to RM48/month in 2018 and to RM51/month in 2Q2019 (blended basis).

For 2018, Celcom reported a sharp decline in pre-tax profit to RM464.5 million (2017: RM1.25 billion) largely due to a one-off assets write-off and some impairment charges. Operating cash flow (CFO) also declined to RM610 million (2017: RM2.27 billion) as a result of the acceleration of certain payments and higher receivables following Celcom’s Q4 sales push for its devices.

While the above have had a significant impact on Celcom’s 2018 pre-tax profit, its business fundamentals remained unchanged. This is demonstrated by its stable 32% OPBITDA margin last year, and by Celcom’ financial results in 1H2019 reverting to previous robust levels. It posted a higher operating profit margin of 16.5% and OPBITDA margin of 30.0% in 1H2019, up from 14.1% and 26.3% in the previous corresponding period. CFO also jumped 72.4% to RM905 million over the same period.

Over the past few years, Celcom has made substantial capex investments to improve network quality and coverage, spending about RM1.1 billion in 2018. Celcom reached 91% and 78% in population coverage on its 4G LTE and 4G LTE-A, up from 86.9% and 74.3% in 2017. As at end-June 2019, Celcom’s 4G population coverage expanded further to 93% while its 4G LTE-A rose to 81%.

At par with its peers in 4G network coverage, Celcom expects a lower capex investment (excluding 5G) of around RM700 million – RM800 million annually in the next couple of years compared to its previous guidance of circa RM1 billion. Celcom expects some spending in 2020 (for 5G trials) while future capital investment will be subject to further study and discussion with other industry players. This will also affect spectrum investments for the 700MHz, 2300MHz and 2600MHz bands upon finalisation of the consortium as guided by the regulators.

Given the highly capital-intensive industry in which telcos operate, MARC expects the level of investment to weigh on free cash flow. In this regard, the rating agency expects Celcom to execute its capital investment strategy in a fiscally responsible manner, pursue a prudent dividend policy and maintain adequate liquidity. With regard to the repayment of the sukuk programme, CNSB has redeemed the RM1.5 billion Series 3 in August 2019 through a RM1.2 billion refinancing facility and RM300 million in internal funds. Similarly, Celcom expects to redeem the next RM1.2 billion Series 4 due in August 2020 via refinancing and internal funds.

Lim Chi Ching, +603-2717 2963/ chiching@marc.com.my;
Hafiza Abdul Rashid, +603-2717 2955/hafiza@marc.com.my

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