Singapore, November 26, 2020 -- Moody's Investors Service has affirmed the Baa3 issuer rating of
Indosat Tbk. (P.T.) (lndosat Ooredoo). At
the same time, Moody's has changed the outlook to stable from
negative.
"The change in outlook to stable from negative reflects the improvement
in Indosat Ooredoo's operational metrics, as well as our expectation
that the company will maintain its market position while keeping its financial
metrics broadly stable over the next 12-18 months,"
says Stephanie Cheong, a Moody's Analyst.
Indosat Ooredoo's Baa3 issuer rating continues to incorporate a one-notch
uplift based on Moody's expectation of high likelihood of support
from its parent, Ooredoo Q.P.S.C. (Ooredoo,
A2 stable), in times of need.
RATINGS RATIONALE
Despite intense competition in Indonesia's mobile sector,
Indosat Ooredoo's operating and financial profile has improved materially
over past several quarters owing to increasing data revenues and its enhanced
network. Its recovering average revenue per user (ARPU) and stable
subscriber base have supported revenue growth of 9.2% in
the first nine months of 2020, outpacing the industry growth which
was flat for the same period.
Indosat Ooredoo's ARPU for the nine months ended September 2020
increased 14% to IDR31,700 compared to a year ago,
while its subscriber base increased 3% to 60.4 million over
the same period.
The company also successfully monetized its non-core tower assets,
which has sustained its ability to fund its ongoing large capex programme.
As a result, Indosat Ooredoo deleveraged faster than Moody's
expectations, with its debt/EBITDA improving to 2.5x at 30
September 2020 from a peak of 3.7x at the end of 2018.
Moody's expects the pace of Indosat Ooredoo's revenue growth
to slow over the next 12-18 months given increased competition
and a weak economic backdrop. Still, strong demand for data
and Indosat Ooredoo's improved network quality and reach following
its accelerated investments in 4G will support modest revenue growth of
around 5% over the next 12-18 months.
In addition, Moody's expects Indosat Ooredoo to maintain high
capex intensity, keeping Moody's-adjusted capex (including
leases) elevated at 42%-46% of revenues over the
next 12-18 months, as the company continues to invest in
enhancing its 4G networks and expansion outside of Java.
While Indosat Ooredoo's large capex plan will continue to drive
negative free cash flow over the next 12-18 months, Moody's
expects a portion of that will be funded from its current high cash balance,
helping to keep leverage manageable around 2.6x-2.8x
over the next 12-18 months, which is within the Baa3 rating
thresholds, although at the weaker end.
Indosat's Ooredoo's liquidity position is good. Its cash
and cash equivalents of IDR4.0 trillion as of 30 September 2020
and availability under its committed revolver facilities of IDR5.1
billion, combined with its projected operating cash flow of around
IDR6.1 trillion over the next 12 months, will be sufficient
to cover its debt maturities of IDR3.4 trillion and projected capital
spending of IDR10.0 trillion.
Furthermore, Moody's expects the company will refinance its maturing
debt with longer-dated rupiah bonds and bank loans. Given
Indosat Ooredoo's demonstrated strong access to the domestic bank
and bond markets, its refinancing risk is manageable.
Indosat Ooredoo's Baa3 rating continues to combine: (1) its
standalone credit strength of ba1, reflecting Indosat Ooredoo's
established market position, moderate financial profile and Moody's
expectation for moderate growth in the Indonesian cellular market given
increasing demand for 4G data services and smartphone penetration;
and (2) the credit support that Moody's believes Ooredoo Q.P.S.C.
(Ooredoo, A2 stable) is likely to provide to Indosat Ooredoo in
times of need, resulting in a one-notch uplift.
The stable outlook reflects Moody's expectation that Indosat Ooredoo
will maintain its market position and a stable financial profile through
steady revenue and earnings growth.
In terms of environmental, social and governance (ESG) considerations,
Moody's has considered governance risk around concentrated ownership
and a dominance of non-independent commissioners and directors
on its boards. Nevertheless, the risk is mitigated by Ooredoo's
track record of remaining rational with respect to its ability to control
Indosat Ooredoo and to extract dividends and cash therefrom.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Upward rating momentum is limited, given the company's small scale
and the competitive operating environment. However, positive
rating momentum may build up over time if there is a consistent improvement
in Indosat Ooredoo's financial profile, such that its (1) adjusted
debt/EBITDA remains below 2.0x on a consistent basis, and
(2) retained cash flow/adjusted debt remains above 35%-40%
on a sustained basis.
The rating could be downgraded if there is a material deterioration in
its underlying credit strength due to intense competition or adverse regulatory
changes, a reduced market share, diminishing profit margins,
weaker operating cash flow or increased shareholder returns.
Metrics indicative of a downgrade include its (1) adjusted debt/EBITDA
rising above 3.0x; or (2) retained cash flow/adjusted debt
remaining below 25%-30% on a sustained basis.
In addition, the one-notch uplift based on expected support
from Ooredoo could be removed if its stake falls below 50% or if
it indicates that Indosat Ooredoo is no longer a core asset.
The principal methodology used in this rating was Telecommunications Service
Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Indosat Tbk. (P.T.) is an integrated telecommunications
network and services provider in Indonesia. The company is the
second-largest cellular operator in the country in terms of revenue
and active subscribers. It also provides multi-media,
data communications, and internet services. The company is
65% owned by Ooredoo Q.P.S.C.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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a.With Rated Entity or Related Third Party Participation:
NO
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The Global Scale Credit Rating on this Credit Rating Announcement was
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Stephanie Cheong
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
Ian Lewis
Associate Managing Director
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
