Singapore, March 21, 2019 -- Moody's Investors Service ("Moody's") has revised
the outlook on P.T. Indosat Tbk.'s (lndosat
Ooredoo) ratings to negative from stable.
At the same time, Moody's has affirmed the company's Baa3 issuer
rating.
RATINGS RATIONALE
"The negative outlook reflects a weakening in Indosat's financial
metrics driven by the company's plans for accelerated 4G capex amid
an intensely competitive operating environment for the Indonesian mobile
sector," says Nidhi Dhruv, a Moody's Vice President
and Senior Analyst.
Indosat Ooredoo's operating and financial profile has weakened significantly
over past quarters, mainly due to the introduction of registration
for pre-paid SIM cards in Indonesia and a more rapid decline in
traditional voice and SMS revenue in 2018.
Specifically, the company's revenue declined by 23%
to IDR23.1 trillion in 2018 from a year earlier, primarily
driven by a 26% decline in the cellular business. Indosat
Ooredoo's subscriber base also fell 47% to 58 million at
the end of 2018 from 110 million at the end of 2017, while average
revenue per user (ARPU) declined 8% to IDR18,700 over the
same period.
"Although the Indonesian mobile sector remains intensely competitive,
there has been some uptick in quarter-on-quarter ARPUs and
revenue growth. A more consistent growth in revenue, leading
to the company steadily recouping its market share and profitability margins,
would be supportive of stabilizing the rating outlook," says Dhruv,
who is also the Lead Analyst for Indosat Ooredoo.
Indosat Ooredoo has suffered steeper declines in its subscriber and revenue
share due to its weak 4G networks, in turn a result of under-investment
by the company over 2016-2018. In Q4 2018, the company
also saw significant leadership changes resulting in a management overhaul
and potentially delaying responses to the rapidly changing competitive
environment.
Under the new management team, Indosat Ooredoo has significantly
increased its capex plans to IDR30 trillion ($2 billion) over 2019-2021
primarily to strengthen the company's 4G networks and expand coverage
ex-Java.
"The accelerated capex investment is key to Indosat Ooredoo's
strategy to remain competitive, especially ex-Java against
its closest competitor, XL Axiata Tbk (P.T.) (Baa3
stable). However, if Indosat Ooredoo heavily debt funds its
aggressive capex plan, its leverage and cash flow metrics will remain
above our tolerance for the rating," adds Dhruv.
Absent any capital restructuring initiatives, Moody's expects Indosat
Ooredoo's adjusted gross leverage will remain at 3.5x-3.7x
over the next 2 years. Its retained cash flow (RCF)/debt is expected
to also weaken in the range of 25%-30%.
"Indosat Ooredoo is exploring alternative funding options -- including
the sale of its towers and monetization of its stakes in some subsidiaries.
However, although such tower sales would benefit the company's liquidity
position, given the capitalization of leases, it would be
leverage neutral. Furthermore, these initiatives would be
time consuming -- driven by market dynamics, and subject
to regulatory and shareholder approvals," adds Dhruv. The
company has stated that at this time it does not foresee an imminent need
to raise equity.
Indosat Ooredoo's liquidity position is strained. Its cash
and cash equivalents of IDR1.0 trillion as of 31 December 2018
and available revolver facilities of IDR3.7 billion, combined
with its projected operating cash flow of around IDR5.0 trillion
over the next 12 months, will be insufficient to cover its debt
maturities of IDR6.4 trillion and projected capital spending of
IDR10.0 trillion.
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, we consider
the refinancing risk to be manageable. Earlier this month,
Indosat Ooredoo successfully completed the first tranche of a bond issuance
in the amount of IDR2 trillion.
Moody's remains cautious about Indosat Ooredoo's credit profile
over the near-term. Nonetheless, the company'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 following price increases by
incumbents since Q3 2018; and (2) the credit support Moody's
believes Ooredoo Q.P.S.C. (Ooredoo,
A2 stable) is likely to provide to Indosat Ooredoo in a distress scenario,
resulting in a one-notch uplift.
The negative outlook reflects Indosat Ooredoo's weak operating and
financial metrics for its Baa3 rating, with limited potential for
near-term improvement in the company's underlying profitability.
The negative outlook also reflects the uncertainties with regard to the
timing and execution of its potential capital restructuring plan.
Moody's will closely review the company's progress over the next
12 months.
The rating could be downgraded if there is a material deterioration in
its underlying credit strength, arising from a reducing market share,
diminishing profit margin, weaker operating cash flow or increased
shareholder returns. Metrics indicative of downward pressure include
(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 the parent company, Ooredoo) could
be removed if the parent company's stake falls below 50% or if
it indicates that Indosat Ooredoo is no longer a core asset.
Given the negative outlook, upward pressure on the rating is unlikely.
However, Moody's could change the outlook to stable if there is
a consistent improvement in Indosat Ooredoo's credit profile and
overall profitability through organic or inorganic measures. Parameters
that Moody's would consider for a change in outlook to stable include
(1) consistent revenue and earnings growth; (2) a consistent improvement
in its debt leverage and a clear plan and capacity for adjusted debt/EBITDA
to remain below 3.0x; (3) retained cash flow/adjusted debt
remaining above 25%-30% on a sustained basis.
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 the 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 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.
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
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Singapore 48623
Singapore
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