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Rating Action:

Moody’s assigns Baa3 issuer rating to XL Axiata, reflecting improved financial profile

21 Jun 2018

NOTE: On September 12, 2018, the press release was corrected as follows: In the Regulatory Disclosures section, the third paragraph was changed to: “With reference to the withdrawal of the rating of XL Axiata Tbk (P.T.): The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.” Revised release follows.

NOTE: On August 30, 2018, the press release and headline were corrected as follows: The headline was changed to “Moody’s assigns Baa3 issuer rating to XL Axiata, reflecting improved financial profile” and the first paragraph of the press release was changed to “Moody’s has assigned a Baa3 issuer rating to XL Axiata Tbk (P.T.) (XL), reflecting a one-notch higher rating than its Ba1 Corporate Family Rating. This is the first time Moody’s has assigned an investment-grade credit rating to the company.”

Singapore, June 21, 2018 -- Moody’s has assigned a Baa3 issuer rating to XL Axiata Tbk (P.T.) (XL), reflecting a one-notch higher rating than its Ba1 Corporate Family Rating. This is the first time Moody’s has assigned an investment-grade credit rating to the company.

The outlook for the rating is revised to stable from positive.

At the same time, Moody's has withdrawn the company's Ba1 Corporate Family Rating.

RATINGS RATIONALE

"The rating upgrade reflects the continued strengthening of XL's operational metrics as well as the ongoing stabilization of its financial profile, including lower leverage levels," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

The Baa3 issuer rating continues to incorporate a one-notch uplift to reflect Moody's expectation of extraordinary support from the parent company, Axiata Group Berhad (Baa2 stable), in a distressed situation. Axiata has a 66.4% shareholding in XL.

Revenue for 2017 grew 7.2% year-on-year to IDR24.6 trillion, as strong growth in cellular data services (+61%) more than offset the continuing decline in voice and SMS (-30%) and interconnection services (-12%). In contrast, XL's revenue growth for Q1 2018 has been weaker at 4.8%, but still ahead of the industry growth rates.

"Competition in the Indonesian mobile sector has intensified over the last two quarters, and the impact on the telcos is exacerbated by implementation of the SIM registration regulation. Given the market fundamentals and track record of recovery in the Indonesian telecom sector, we are looking through this short-term volatility towards the longer-term growth potential and stability of the sector," adds Dhruv, also Moody's lead analyst for XL.

"Moody's expect XL's revenue growth to slow down to 4.0-4.5% in 2018, and return to a growth rate of 6.0-6.5% in 2019, as the company focuses on increasing data monetization on the back of strong demand for 3G/4G LTE services, the increasing proliferation of smartphones, and moderate growth in its subscriber base," adds Dhruv.

Moody's also expects the company to maintain its strong adjusted EBITDA margins of around 48.0-50.0% over the next two years through further cost controls including a better management of network-related costs.

Leverage -- as measured by adjusted debt to EBITDA has remained steady at around 2.5x since 2016. Over FY2018-2019 we expect leverage to trend towards 2.2x-2.3x -- reflecting both lower debt levels and higher EBITDA. In addition, the company's US dollar debt exposure declined to around 24.4% from around 44% in 2015. Moody's expects a further reduction over the next 12-18 months as the company continues to refinance its US dollar revolvers with rupiah debt and bonds.

"In keeping with the investment-grade rating, Moody's expects the company to maintain a prudent financial policy, with low leverage and prioritizing the deployment of excess cash towards debt repayments and capital expenditures instead of towards large acquisitions and increased shareholder returns," adds Dhruv.

Given the continued investments needed to enhance its 3G and 4G LTE networks, Moody's expects XL's cash capex in 2018 and 2019 to be around IDR7.0 trillion, slightly higher than its capex for 2017 of IDR6.7 trillion, as it continues to increase its network capacity and coverage, especially outside of Java.

Moody's expects a large portion of XL's IDR7.1 trillion near-term debt maturities to be refinanced, as cash on hand of IDR3.3 trillion as of 31 March 2018 and projected cash flow from operations of around IDR7.4 trillion in the next 12 months will be insufficient to cover projected capex requirements, debt maturities, and potential dividend payments.

XL's rating reflects its fundamental credit strength, underpinned by its established market position, strengthened networks, high margins, and improved financial profile, despite the competitive operating environment. As a result, it is well positioned to benefit from the favorable growth dynamics in the industry.

The stable outlook reflects our expectation that XL will maintain a strong financial profile through steady revenue and earnings growth, and that the competitive and regulatory environments remain benign.

What Could Change the Rating -- Up

An upgrade is unlikely over the near-term. Over time, an upgrade to XL's issuer rating would require further improvement in the company's financial profile, such that (1) adjusted debt/EBITDA falls below 1.5x on a consistent basis, and (2) retained cash flow/adjusted debt remains above 40%-45% on a sustained basis.

What Could Change the Rating -- Down

The rating could be downgraded if there is a material deterioration in its underlying credit strength, arising from diminishing profit margins, weaker operating cash flows, or increased shareholder returns. Metrics indicative of downward pressure include (1) adjusted debt/EBITDA rising above 2.5x on a consistent basis, or (2) retained cash flow/adjusted debt falling below 30% on a sustained basis. In addition, the one-notch uplift -- based on expected support from parent company, Axiata Group Berhad (Baa2 stable) -- could be removed if its stake falls below 50%, or if it indicates that XL is no longer a core asset. XL's rating could also face pressure if Axiata's rating is downgraded.

The principal methodology used in this rating was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

XL Axiata Tbk (P.T.) is the third largest cellular provider in Indonesia in terms of revenue. As of 31 March 2018, it had 54.5 million subscribers. It owns a nationwide cellular network covering all major cities in Java, Bali and Sumatra, as well as populated centers in Sulawesi and Kalimantan.

XL is 66.4%-owned by Axiata Group Berhad (Baa2 stable). Axiata is in turn 60% owned by Khazanah Nasional Berhad and related entities of the Government of Malaysia (A3 stable). The UAE-based Emirates Telecommunications Grp Co PJSC (Aa3 stable) holds 4.2% of XL's shares and the public the rest.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

With reference to the withdrawal of the rating of XL Axiata Tbk (P.T.): The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nidhi Dhruv, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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