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Rating Action: Moody's changes Indosat Ooredoo's outlook to stable from negative; affirms Baa3 rating
Global Credit Research - 26 Nov 2020
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.
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.
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.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
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The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
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c.With Access to Management: NO
For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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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
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