Fitch revises Kazakh Kazakhtelecom's outlook to positive
Baku, Azerbaijan, Dec. 30
By Elena Kosolapova - Trend: The International Rating Agency Fitch Ratings revised the Outlook on Kazakhtelecom's (Kaztel) Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB'. The agency has also upgraded the National Long-term rating to 'A+(kaz)' from 'A(kaz)' and assigned a Positive Outlook.
Short-Term IDR was affirmed at 'B'. Local currency Long-Term IDR was affirmed at 'BB', outlook revised to Positive from Stable. Senior unsecured debt in foreign and local currency was affirmed at 'BB'. Senior unsecured debt in local currency was upgraded to 'A+(kaz)' from 'A(kaz)'.
Rating on the proposed 90 billion tenge (182.35 tenge = $1) programme including the first 21 billion tranche was affirmed at 'BB(EXP)' and upgraded to 'A+(kaz)(EXP)' from 'A(kaz)(EXP)'.
"The Outlook revision to Positive reflects the company's improving liquidity, narrowing mismatch between predominantly domestic revenues and FX debt, improving cash flow, a successful launch of mobile operations and therefore lower execution risks associated with further mobile expansion," Fitch said.
Kaztel is likely to maintain its dominant positions in the fixed-line segment, helped by benign regulation and a shortage of alternative networks, according to the rating agency. Kaztel estimated its fixed-line telephony market share at a high 93 perent at end-2013. Fixed-to-mobile substitution is a key threat, and this will drive modest fixed-line disconnections and pricing pressures in the voice segment, in our view. Expected interconnect rate cuts may exert additional pressure on traditional fixed-line revenue in the medium term but should not trigger any significant changes in the competitive environment.
The Kazakh broadband market still retains strong growth potential, driven by fairly low broadband penetration in the country (31 percent of households as of end-2013), the rating agency said. The company remains an absolute broadband leader with over a 70 percent market share. Kaztel has completed its fibre infrastructure roll-out in key cities, strengthening its technological advantage over peers. Key large rival Vimpelcom significantly slowed down its broadband expansion in the country in 2014, which should lead to less aggressive competition for Kaztel.
Fitch forecasts that the company is facing reasonably positive prospects in the mobile market with its LTE service. Kaztel remains the only 4G operator in the country, which gives it a significant competitive advantage over peers in terms of broadband speed that it can offer to its customers. New subscriber additions in the data-only (dongles) segment have been strong, implying that the company has been able to convert its technological advantage into market share gains. An expected decline in low-ARPU CDMA voice subscribers has been largely offset by new higher-paying GSM customers.
Execution risks are notably higher in the mass mobile segment. The Kazakh market is well-penetrated with 3G data and GSM voice services and is highly competitive.
The end of Kaztel's active fibre development project, the completion of the first stage of mobile roll-out and a strategic decision to smooth out further mobile investments will result in a substantial decrease in capex spend, both in absolute and relative terms, according to Fitch. As a proportion of revenues, capex is expected to drop to approximately 20 percent in 2015-2017, compared with slightly above 30 percent in 2012-2014. Kaztel's capex peaked in 2014.
"We expect that 2015 cash flow generation would remain fairly depressed, reflecting the impact of continuing mobile development, one-off roll-out costs and sign-up subscriber promotions. We project pre-dividend free cash flow margin to recover to mid-high single digits in 2016-2017, from negative territory in 2014," Fitch said.
Kaztel is likely see a peak in its FFO adjusted gross leverage at slightly above 2x, before stabilising below this level. The increase in leverage in 2015 will be driven by a decline of reported EBITDA and FFO margins, and by sluggish cash flow generation. EBITDA and FFO will be under pressure from substantial one-off mobile roll-out and promotional costs in 2015. We expect pre-dividend free cash flow to remain in a marginally negative territory during that year.
Fitch projects Kaztel's deleveraging flexibility to improve from 2016.
"The company's credit profile is likely to be resilient to potential foreign currency exchange rate volatility. By our estimates, stressing the metrics for a 50 percent tenge devaluation would only increase leverage by 0.4x total debt/EBITDA, which can be accommodated within the current rating level," the rating agency said.
Kaztel's ratings reflect its standalone credit profile. Kaztel is of only limited strategic importance for Kazakhstan, while operating and legal ties with its controlling shareholder, government-controlled Samruk-Kazyna, are weak. Although indirect government control is a positive credit factor, it does not justify a rating uplift, Fitch said.
A protracted rise in gross leverage to above 2.5x total debt/EBITDA and 3x funds from operations (FFO)-adjusted leverage (end-2013: 1.4x), and/or a material increase in refinancing risks individually or collectively may lead to a negative rating action.
A sustained decrease in gross leverage to below 1.0x total debt/EBITDA and 1.5x FFO-adjusted leverage and successful development of the mobile segment demonstrating strong operating and financial performance individually or collectively may to a positive rating action.
Elena Kosolapova is Trend Agency's staff journalist, follow her on Twitter: @E_Kosolapova