Fitch Upgrades XL Axiata to BB+ - The Indonesia Today

Fitch Ratings has today upgraded Indonesia-based telecom operator XL Axiata's (XL) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB+' from 'BB'. The outlook is positive.

Fitch also upgraded XL Axiata's National Long-Term rating to 'AA(idn)' from 'AA-(idn)' with positive outlook. While, senior unsecured rating on IDR1.5trn upgraded to 'AA(idn)' from 'AA-(idn)' and senior unsecured 'BB' rating on USD250m notes withdrawn following repayment.

The upgrade reflects XL's significantly improved financial performance in 2010, with revenues and EBITDAR growing 27% and 50% respectively. EBITDAR margins improved to 52.9% in 2010 from 45% in 2009 due to higher revenues, lower network costs and the company's focus on cost efficiencies. For 2010, Fitch estimates XL's market share by subscriber and revenue would have improved to levels to rival the second-largest telecom operator, PT Indosat Tbk (Indosat, 'BBB-'/Stable). XL's GSM revenue market share improved to 20% in 2010 from 18.5% in 2009.

Fitch notes XL's strategic importance to its Malaysian parent, Axiata Group Berhad (AGB; which has a 66.7% beneficial ownership of XL). This is reflected in one-notch uplift to XL's 'BB' standalone rating, in line with the agency's Parent and Subsidiary Rating Linkage Methodology. XL accounted for 40% and 47% of AGB's revenue and EBITDA, respectively, in 2010. It is now the highest contributor to AGB's overall EBITDA; surpassing the group's Malaysian subsidiary Celcom's 42% share.

The ratings are constrained by Fitch's expectations that competition within the sector would likely intensify, particularly from Indosat which, following management changes in 2010, is likely to step up its product offering. Fitch also expects further competition from the potential merger of PT Telekomunikasi Indonesia Tbk's ('BB+'/Stable) CDMA "Flexi" business and PT Bakrie Telecom Tbk ('B'/Stable), which would create the fourth largest telecom operator after XL with a subscriber market share of 12.5%. In particular, the possible new entity could pose a challenge to XL with its competitive pricing of CDMA relative to GSM.

Fitch notes XL's new dividend policy to distribute a minimum 30% of its previous year (normalised) net income. Although the agency is comfortable with the company's strong post-distribution free cash flows (FCF), aggressive dividend payouts in 2011and 2012 could put pressure on its credit metrics.

The positive outlook reflects Fitch's expectations that XL would maintain its funds from operations (FFO)-adjusted net leverage below 1x, strong cash flow generation with moderate capex investments, and EBITDA margins.

Higher-than-expected debt-funded capex and/or dividend payout, or a significant deterioration in the operating environment leading to FFO-adjusted net leverage above 2x on a sustained basis would lead to XL's Outlook being revised to Stable. The ratings may also come under pressure if AGB reduces its majority stake in XL. Conversely, positive rating triggers include net leverage being sustained below 1x, a pre-dividend FCF of around 15% of revenues and higher cellular revenues than Indosat.