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Announcement:

Moody's: Telekom Malaysia's ratings not immediately impacted by its broadband improvement plan

25 Oct 2016

Hong Kong, October 25, 2016 -- Moody's Investors Service says that Telekom Malaysia Berhad's (TMB, A3 stable) announcement of a broadband improvement plan in 2017 will not immediately impact its A3 issuer rating and senior unsecured ratings.

TMB's announcement followed the Prime Minister's announcement on 21 October of the Malaysian government's (A3 stable) budget for 2017, which includes moves to ensure that Malaysians can enjoy greater value broadband packages.

To accomplish this goal, fixed-line broadband service providers, such as TMB, will have to offer services at a higher speed for the same price beginning in January 2017. The Prime Minister also announced that, within the next two years, broadband speed will be doubled and prices reduced by 50%.

"Lower prices and the potential for an increase in capital expenditure to support this plan are credit negative for TMB as they may pressure cash flows or raise debt levels in 2017," says Annalisa DiChiara, a Moody's Vice President and Senior Credit officer.

TMB's adjusted debt/EBITDA was 2.0x at June 2016 and the company expects capex/revenue of around 30-35% in 2016 (including mobility services investments).

"At the same time, the financial implications for TMB in 2017 and beyond are unclear at this stage with respect to (1) the additional capital outlays required for the program by TMB, (2) any potential co-investments from the government, and (3) the potential for an increasing subscriber base or migration of TMB's customers to higher value packages to more than offset the expected price decline," adds DiChiara.

Moody's sees TMB's broadband improvement plan as an acceleration of the company's digital transformation program. TMB is already investing heavily in High Speed Broad Band (HSBB) Phase 1 and 2 and Sub Urban Broadband (SUBB) projects which are being carried out in conjunction with the government.

HSBB phase 1 is a 10-year project (started in July 2008) to expand broadband penetration in Malaysia. It is a high profile national project initiated by the government, although TMB is responsible for implementation. As part of HSBB Phase 1, TMB and the government have together invested RM9.2 billion; of this total, the government's co-investment was RM2.4 billion, by way of a grant to TMB, and the balance borne by TMB.

In February 2015, TMB announced HSBB Phase 2 and SUBB projects, which will require an investment of RM3.4 billion over a 10-year period. Again the project cost will be shared with the government.

Of the total HSBB Phase 2 project cost of RM1.8 billion, TMB will invest RM1.3 billion, while the government will invest RM500 million. Meanwhile, TMB will invest RM1.0 billion for the SUBB project -- out of the total RM1.6 billion total cost -- while the government will fund the rest over 10 years.

Moody's expects these investments will be front-loaded in the initial years and will be funded, in part, with debt.

Still, Moody's expects that TMB will continue to deliver on its business model and that growth in broadband revenues will continue to outweigh the decline in traditional voice-based results. We also expect the company to maintain a prudent financial policy with leverage in the 2.0-2.5x range over the next 18 months.

On the other hand, negative ratings pressure could arise should this acceleration of its investment plan drive cash flow below our expectations or cause debt levels to rise materially, such that adjusted debt/EBITDA trends above 2.5x as compared to 2.0x as of June 2016. Such risks would also be measured by adjusted retained cash flow (RCF)/debt falling below 25-30%, or adjusted debt/EBITDA remaining above 2.5x on a consistent basis.

TMB is the largest fixed-line and broadband telecommunications operator in Malaysia. As of June 2016, Malaysian government-related entities held approximately 61.3% of TMB's shares. The largest shareholder is Khazanah Nasional Berhad (A3 senior unsecured, No outlook), the government's strategic investment fund, which owns 28.65%. The Ministry of Finance also owns a 'special share' which allows the government to ensure that TMB's major decisions are consistent with government policy.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Annalisa Di Chiara
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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