RAM says Telekom ratings can withstand potential broadband price cuts

The company expects 70% of its Streamyx customers to enjoy Unifi fibre broadband services by end-2020.

KUALA LUMPUR: Telekom Malaysia Bhd's (TM) ratings will be able to withstand the potential price cuts of 25% for its broadband services by year-end though the gearing level may peak and funds from operations debt coverage may thin.

RAM Ratings said on Friday it was analysing the potential credit impact of the government’s recent call to double broadband speed and halve prices on Telekom.

“Pending further details on TM’s affordable broadband packages within the coming quarter, our initial assessment assumes a gradual 25% reduction in broadband subscription rates over the next two years, flat subscriber growth and further debt drawdown – for capex and dividends,” it said. 

RAM said its analysis indicates that TM’s gearing level may peak at 1.50 times while its funds from operations debt coverage may thin to an average of 0.31 times in the next three years (FY Dec 2017: 1.10 and 0.44 times). 

It said as the telcos's credit metrics are expected to remain within its rating threshold, it does not foresee any immediate impact on the AAA/Stable/P1 ratings of the group’s sukuk programmes, or the AAA/Stable rating of Hijrah Pertama Bhd’s sukuk. 

It said that its rating approach also considers TM’s strategic role and strong relationship with the government, which in its view renders the group privy to extraordinary government support, if required.

On June 20, 2018, the Government announced that broadband subscription rates could be reduced by 25% by year-end pursuant to the implementation of the Mandatory Standard Access Pricing (MSAP). 

The retail broadband segment constitutes the bulk of TM’s top line (FY Dec 2017: 44%). 

“As the sole owner and operator of the high-speed broadband (HSBB) network, we expect this move to have the most pronounced impact on TM’s financial position, as the implementation of the MSAP would lower wholesale prices on HSBB access for the other telecommunication companies (telcos).

“This would allow the telcos to cut the prices of their broadband packages, thereby compelling TM to revise theirs accordingly to remain competitive. As it is, competition is intensifying - with a noticeable shift in consumer preferences to mobile and wireless broadband.

“At this juncture, TM and its counterparties are still in discussions to finalise wholesale prices; this is targeted to be completed within the next one to two months,” it said. 

RAM said it could reassess our stance if changes in the government’s directive and/or the group’s pricing strategies differ from our current expectations.