Baku, Azerbaijan, Dec. 22
By Nigar Guliyeva - Trend:
Fitch Ratings has affirmed Kazakhtelecom JSC's (Kaztel) Long-Term Issuer Default Rating (IDR) at 'BB+'. The Outlook on the IDR is Stable.
Fitch raised the downgrade threshold to 2.5x funds from operations (FFO) adjusted net leverage, from 2x, after Kazakhtelecom repaid the US dollar-linked debt instrument in 4Q17, removing a currency mismatch between revenue and debt. All the outstanding debt is now in Kazakh tenge.
"Kaztel is a strong fixed-line incumbent with dominant market shares in traditional telephony and fixed-line broadband services, operating in a benign regulatory environment. The company created a mobile joint venture with Tele2 that had an about 26% subscriber market share by end-1H17 and is on track to improve its profitability due to larger scale and post-integration synergies," Fitch Ratings reported.
Kaztel's funds from operations (FFO) adjusted net leverage is low, and unlikely to spike above 2x on the expected acquisition of Tele2's stake in the mobile joint venture in 2019.
Fitch expects Kaztel to maintain its leading position in the fixed-line segment, helped by benign regulation and a shortage of alternative networks. "Kaztel estimated its fixed-line telephony market share by revenue at a dominant 93% at end-2016. The company consistently retains above 70% market share in fixed-line broadband (75% by subscribers at end-2016), where it generates almost half of its total revenue. It also has a strong position in the pay TV market with a 36% revenue share, although this is smaller than in other fixed-line segments. Nevertheless, this segment has the highest growth rates, supporting overall revenue growth," Fitch Ratings said.
The agency reports that Kazakhstan's broadband market was fully restored in revenue terms in 2016 after a sharp decline by 11% yoy in 2014. The market is approaching saturation and revenue growth rates are likely to slow to low single digits yoy from 2017 from mid-single digits in 2014-2016. Fixed-line broadband penetration remains low at 9.2% of households at end-2016, which leaves upside for growth. Competition is concentrated in large cities where there are several facilities-based operators. It remains rational, as indicated by companies' ability to selectively increase prices without a material impact on their market shares.
Furthermore, Kaztel's mobile JV with Tele2 had strong performance in 9M17, with its subscriber market share reaching 26% in 2Q17, up from 25% at end-2016.
"Competition in the Kazakhstan mobile market has intensified in recent years and has been affected by the disruptive behaviour of Beeline and Tele2/Altel JV, driven by their attempts to increase market shares. However, the market has largely stabilised in 2017, as shown by the removal of promotional unlimited offerings and selective increases in prices that support ARPUs," Fitch Ratings said.
"Kaztel's ratings are driven by the company's strong market positions in key fixed-line segments, robust FCF generation, low leverage and a benign regulatory environment. Its peer group includes Russian fixed-line incumbent Rostelecom PJSC (BBB-/Stable), mobile operators PJSC Mobile TeleSystems (BB+/Rating Watch Negative) and PJSC Megafon (BB+/Stable), and PJSC Tattelecom (BB/Stable), a regional incumbent in the Republic of Tatarstan."