SLT's revenue growth challenging due to VAT hike – Fitch
Fitch Ratings has revised Sri Lanka Telecom's (SLT) Outlook to Stable and said Fitch expect SLT's revenue growth to slow to 2%-3% in 2017 (2016 estimated: 9%), as consumers will likely curb usage due to the reintroduction of value-added tax and nation-building tax on telecom services from November 2016.
"The effective tax rate for voice and SMS services increased to about 50%, from 28%. The effective tax on data services increased to 32% from 12%, and will further increase to 50% when the telecommunications levy increase becomes effective from April 2017. Revenue growth from increased use of data services is likely to be more than offset by declines in revenue from fixed-voice, code division multiple access and international operations," Fitch stated.
Fitch Ratings-Singapore/Colombo-14 February 2017: Fitch Ratings has revised the Outlook on Sri Lanka Telecom PLC's (SLT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at 'B+'.
The rating actions follow the Outlook revision on Sri Lanka's Long-Term Foreign and Local-Currency IDRs to Stable from Negative on 9 February 2017. The agency also affirmed SLT's National Long-Term Rating at 'AAA(lka)' with a Stable Outlook.
Key Rating Drivers
Ratings Constrained by Sovereign:
SLT's IDRs are constrained by the sovereign's IDRs of 'B+', as the government directly and indirectly holds a majority stake in SLT and exercises significant influence on its operating and financial profile. Therefore the Outlook has been revised to Stable, following the revision of the sovereign Outlook to Stable. SLT's second-biggest shareholder, Malaysia's Usaha Tegas - which owns 44.9% of SLT - does not have any special provisions in its shareholder agreement that dilute the government's significant influence over SLT.
Negative FCF, Large Capex:
We expect SLT to have negative FCF in 2017-2018 (2016 estimated FCF deficit: LKR 7 billion-8 billion), as cash flow from operations will be insufficient to fund its large capex plan. We expect SLT to invest about LKR 20-22 billion, or 28%-30% of revenue, in capex each year to expand its optical fibre and 3G/4G mobile networks.
Taxes Hinder Growth:
We expect SLT's revenue growth to slow to 2%-3% in 2017 (2016 estimated: 9%), as consumers will likely curb usage due to the reintroduction of value-added tax and nation-building tax on telecom services from November 2016. The effective tax rate for voice and SMS services increased to about 50%, from 28%. The effective tax on data services increased to 32% from 12%, and will further increase to 50% when the telecommunications levy increase becomes effective from April 2017. Revenue growth from increased use of data services is likely to be more than offset by declines in revenue from fixed-voice, code division multiple access and international operations.
We forecast SLT's EBITDA margin to narrow by about 50bp over 2017-2018, from an estimated 29% in 2016, as improving profitability of fixed-broadband and mobile internet usage will only partly offset margin erosion from a change in revenue mix and the tax hikes.
Solid Market Position:
SLT's ratings are underpinned by its market-leading position in the fixed-line services and second-largest position in the mobile market, along with its ownership of the country's extensive optical fibre network. The company benefits from a diverse service offering, which includes fixed-voice, broadband, mobile, pay-tv, enterprise, international terminations and international data services. We believe SLT's market position will strengthen from its planned mobile and fibre infrastructure expansion.
Market Consolidation, M&A Risk:
We believe some industry consolidation is likely with ongoing intense competition – especially in the mobile segment where there are five operators, of which the smaller operators are unprofitable, and all of them face still-high investment requirements. SLT's National Long-Term Rating could come under pressure if it were to do a debt-funded acquisition of a smaller operator; any rating action will be based on the acquisition price, funding structure and the financial and operating profile of the combined entity. The international ratings, which are constrained by the sovereign ratings, have sufficient headroom to absorb a debt-funded acquisition.
SLT's Foreign-Currency and Local-Currency IDRs are constrained by Sri Lanka's IDRs of 'B+', given the government's ownership and significant influence on its operating and financial profile. SLT's National Long-Term Rating is based on a relative comparison of domestic peers. SLT has a lower exposure to the crowded mobile market and more diverse service platforms than Sri Lanka's mobile market-leader, Dialog Axiata PLC (AAA(lka)/Stable). Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Rating Watch Negative) faces high regulatory risk, with frequent excise tax hikes. However, it benefits from a higher EBITDAR margin and stronger FCF generation than SLT. SLT's estimated 2016 FFO-adjusted net leverage of 1.5x is broadly similar to that of Dialog Axiata and DIST.
Fitch's key assumptions within our rating case for the issuer include:
= Slower revenue growth of 2%-3% in 2017 (2016: 9%) on higher taxes.
= Growth to recover from 2018 to a mid-single-digit percentage, driven by fixed-broadband and mobile data services.
= Operating EBITDAR margin to fall by about 50bp in 2017-2018, due to a change in revenue mix and higher taxes.
= Capex/revenue to remain high around 28%-30%, as SLT expands it fibre and 3G/4G networks.
= Dividend payout to remain similar to 2016, at LKR 1.6 billion.
= Negative FCF during 2017-2018, resulting in gradual increase in FFO-adjusted net leverage.
Developments that may, individually or collectively, lead to positive rating action include:
=A change in Sri Lanka's IDRs will result in a corresponding action on SLT's IDRs.
=A weakening of links between SLT and the sovereign could result in SLT's Local-Currency IDR being upgraded above Sri Lanka's Local-Currency IDR. However, SLT's Foreign-Currency IDR will remain constrained by the Country Ceiling of 'B+'.
Developments that may, individually or collectively, lead to negative rating action include:
= A downgrade in Sri Lanka's IDRs will result in a corresponding action on SLT's IDRs.
= A debt-funded acquisition of a smaller operator could threaten SLT's National Long-Term Rating, depending on the acquisition price and the financial profile of the combined entity.
Solid Access to Capital:
Cash of LKR 5.8 billion and committed undrawn bank lines of LKR 7.9 billion were insufficient to fund its short-term debt of LKR 12.7 billion and annual FCF deficit of LKR 3-5 billion. However, SLT is in the process of raising LKR 6 billion to refinance its short-term debt and has demonstrated a solid record of accessing capital from local banks and capital markets.
- China to provide 90 water bowsers worth Rs 1b 2095
- Wag the Dog 2117
- A brief look at FARC’s origins in Colombia 2059
- ‘Panama Papers’ bags Pulitzer 2071
- SAITM will cooperate with Govt 2084
- dead man was near fashion mall 2113
- Japanese MPs back Lanka’s development 2083
- CB Bond earnings whitewashed – JVP 2095
- Talks to extend Lanka’s Continental Shelf 2084
- Ex-DIG and son re-remanded 2095
- Government can be sent home 2628
- GMOA flogging SAITM for Mahinda– Rajitha 2092
- Ranil invites Japan to invest in S. Asia 2081
- Somali Pirates’ Captives Back Home 2081
- Customs in Rs 8 M bust 2086
- Redefining Rape 2116
- The march of folly Our mad Cabinet system 1716
- First adventures in Europe 1803
- Inspiration for writers 1800
- Sri Lanka’s sustainable development dream 1858
- Sinhala and Tamil New Year with Easter 1936
- Filipino Oconer wins overall title 1723
- Unsporty conduct by Joes 1751
- Bertie Wijesinghe, pre-Test era Sri Lankan cricketer, dies aged 96 1738
- CEAT revs up for 2017 1723
- Palace shock Arsenal 1718
- Argentina fire coach Bauza 1729
- BCCI postpones SGM to 18 April 1721
- Murray returns from injury 1718
- New mum Azarenka to return to WTA 1706
- Galle win by 188 runs 1703
- Keeping Cool 1726
- Do the right thing and do it now! 1729
- Ravi Jayewardene Pious son of a political giant 2296
- In the heart of the old country 2144
- Sarath Weerasekera’s Geneva adventure 1940
- No moral right to play with public funds 1882
- No need for fine if route permits are issued in fair, just manner 1756
- UDA incurs Rs 330M Loss 1709
- DOUSING A MEGA SHIP FIRE 1543
- Health authorities in denial? 2004
- Minorities’ frustration a powder keg – VIDURA 2067
- Administrative powers a must for the Plantation Tamils –Radhakrishnan 1318
- Rajapaksa sought advice from McGuinness– Indika Perera 2410
- I will lead SLFP to victory in future elections – President 1831
- Hang the ‘traitors’– RTD. REAR ADMIRAL WEERASEKARA 2128
- We oppose Nationalism and Federalism – Samarasinghe 2932
- SilkAir launches direct flights to Colombo 1751
- Rupee falls on thin volumes 1719
- SriLankan, Japan Airlines add new routes 1739
- Colombo Port box volume up 5.6-pct in Jan 1723
- Private sector to transform into main domestic growth engine 1743
- Oil eases from 5-week top, rising US production weighs 1715
- Tight fiscal and monetary policies constrain SL’s growth 1728
- Shell admits dealing with money launderer 1729
- Toshiba may sell chip business to Foxconn for $27bn 1718
- Asian shares pressured by geopolitical risks; Nikkei down 0.25% 1721
- SLIM launches Certificate in Digital Marketing 1725
- Microsoft Hosts Second ‘Device Day’ in Sri Lanka 1719
- Emirates named Best Airline in the World 1721
- Turkish Airlines and social media assist Somalia 1720
- Brain cell therapy ‘promising’ for Parkinson’s disease 1724
- Trump pushed into bombing Syria 1767
- Thailand discovers Power of Women Travellers 1730
- Economics of gambling 1591
- Trans National Aural Identity 3292
- Queen Anula The Shadow of Cleopatra 3314
- Poetry and its possibilities Part 2 3339
- The Enigma of Labyrinths 3443
- From Couture to Kutir 3311
- Hybrid Sources 4717
- Offering Riddles & Enigmas 4790
- Poetry and its possibilities 4797
- With a festive bang! 945
- Easter Fun 940
- Arrogance and crowing is the way of the doomed 958
- Avurudu on the streets 974
- Tick control 941
- Sunny Sunday on the beach 954
- It’s time to save the world 1020
- From viewer to YouTuber! 1015
- Expert skincare and makeup 1030
- Avurudu at Induruwa 996
- Exo 1019
- Remembering our fallen heroes 2101