Fitch Rating sees challenging times ahead for South, Asean telcos

KUALA LUMPUR: Fitch Ratings expects most South and Southeast Asian telecommunications operators to face a generally challenging environment in 2015, although its sector outlooks will remain broadly stable. 

The ratings agency said on Monday the telcos free cash flow (FCF) will be minimal or negative due to high capex while profit margins will decline on competition.

“Revenue growth will be limited to low-to-mid single digit percentages as fast-growing data services offset declines in traditional voice and SMS revenues,” it said.

Fitch pointed out that FCF would be under pressure as telcos will continue to invest heavily in 3G/4G networks at the same time as cash from operations grows slowly due to lower margins. 

It noted that Philippine, Sri-Lankan and Thai telcos’ investment requirements are particularly high as they plan to invest 25%-30% of their revenue either to expand networks or acquire new spectrum. 

As for major Indian telcos, they would also need to acquire additional spectrum to support growing data traffic. 

Fitch said Singaporean telcos' FCF will also be low despite reduced capex at 10% to11% (2014: 13%) of revenue as they will continue to distribute 80%-100% of their net income in dividends.

As for revenue, it said Indian, Indonesian, Sri-Lankan, and Philippines telcos' 2015 revenue was likely to grow by mid-single-digits due to growing data usage arising from the greater availability of cheaper smartphones and generally affordable data tariffs. 

Singaporean telcos' revenue will only grow by low-single-digit due to higher intensity of cannibalisation of voice/text and international revenues by data. This is in spite of higher data revenues as the industry moves to volume-based pricing. 

“Malaysian and Thai telcos' revenue is likely to grow by low single digits due to intense competition,” it said.

Fitch also said Philippines, Malaysian and Indonesian telcos' 2015 profit margins would decline due to competition, higher marketing expenses and data-to-voice/text substitution. 

Philippine telcos, it said, were most exposed to margin declines as their most profitable text revenue is replaced by data services given that text's revenue contribution is highest at 30% than peers. 

Indian telcos' margins are likely to remain stable benefitting from a gradual rise in voice tariffs as pricing powers return to major telcos.

However, Singaporean telcos' EBITDA margins could improve by 1 percentage point. They may benefit from volume-based pricing and lower handset subsidies as monthly data use per subscriber grows higher, it said. 

In addition, private Thai telcos' profitability could improve by 3 percentage points in 2015. Regulatory cost savings will more than offset their higher marketing costs as consumers migrate to the 3G licensing regime from 2G concessions. 

On the outlook, Fitch said weaker telcos in India, Indonesia and Sri-Lanka might consolidate or exit the industry allowing the remaining telcos to enjoy higher tariffs.

These weaker, unprofitable operators will see mergers as a way to strengthen their uncompetitive market positions, and to maximise their ability to invest in capex, given their limited financial flexibility. 

“However, significant debt-funded acquisitions leading to weaker balance sheets could lower rating or reduce ratings headroom. Sri-Lanka continues to be the most crowded market with five operators serving a population of 21 million,” it cautioned. 

Fitch believed that most South and South-East Asian telcos had moderate to high ratings headroom going into 2015. 

However, three telcos which have relatively lower ratings headroom include - Bharti Airtel Limited (BBB-/Stable), Singapore Telecom (A+/Stable) and PT Tower Bersama Infrastructure (BB/Stable). 

All three have higher leverage than peers at their ratings level and have limited financial flexibility for additional debt-funded M&A.