Monday, 7 May 2012

S&P revises outlook on Axiata to positive from stable

KUALA LUMPUR (May 7): Standard & Poor's Ratings Services has revised its outlook on Axiata Group Bhd to positive from stable.

In a statement Monday, S&P said that that at the same time, it affirmed its 'BBB' long-term corporate credit rating on the company.

“We raised our ASEAN scale rating on Axiata to 'axA+' from 'axA' to reflect the revised outlook.

“In addition, we affirmed our 'BBB-' issue rating on the senior unsecured notes that Axiata unconditionally and irrevocably guarantees. Axiata SPV 1 (Labuan) Ltd. issued these notes,” it said.

S&P credit analyst Mehul Sukkawala the outlook was revised to positive because S&P expects Axiata to maintain its improved financial risk profile.

"We anticipate that Axiata's free operating cash flows will remain positive over the next 18-24 months and that the company will maintain its strong financial ratios. We also revised Axiata's financial risk profile to "modest" from "intermediate" based on the company's strong financial performance,” he said.

Sukkawala said strong and stable cash flows at most of Axiata's key operations had resulted in strong financial ratios.

He said that for the past two years, the company's adjusted-debt-to-EBITDA ratio has been 1 time and its ratio of funds from operations (FFO) to adjusted debt has been more than 75%.

“We have adjusted all cash over RM2.5 billion, which we believe is required for operations, against debt,” he said.

Sukkawala said S&P expects Axiata to maintain its strong financial ratios because we expect its revenue growth at 4%-7% over the next two years.

“However, the company's EBITDA margin is likely to be lower at about 42% because of investments in the data business.

“Axiata's revenue growth was 5% and adjusted EBITDA margin was 45% in 2011,” he said.

Sukkawala said Axiata was expected to maintain its current level of capital expenditure over the next two years, and use positive free operating cash flow to pay dividends.

“However, its financial ratios could be lower than our expectations if a material acquisition or shareholder distribution results in significant negative discretionary cash flow,” he said.

“Our assessment of Axiata's business risk profile remains satisfactory,” he said.

The company's favorable market position in all its key markets contributed to its good operating performance in 2011.

Nevertheless, Axiata remains exposed to the political, macroeconomic, and regulatory risks in emerging markets. The company is also susceptible to the high capital investment and significant competitive pressures associated with such markets.

We assess Axiata's stand-alone credit profile as 'bbb'. In accordance with our criteria for government-related entities, our view of a "moderate" likelihood of extraordinary government support in the event of financial distress is based on our assessment of the company's "strong" link with the Malaysian government and its "limited" role in Malaysia's economy.

Sukkawala said S&P could raise the rating in the next 12 months if Axiata continued to follow conservative financial policies.

“Such policies would mean that the company will maintain an adjusted-debt-to-EBITDA ratio of less than 1.5 times and that it will not generate significant negative discretionary cash flow.

“We could also raise the rating if we raise the local currency sovereign rating on Malaysia,” he said.

He said S&P could revise the outlook to stable if Axiata's cash flow generation significantly deteriorates resulting in an adjusted-debt-to-EBITDA ratio of more than 2.0x.

“Cash flows could deteriorate if: (1) Axiata's operating performance weakens; (2) the company makes material debt-funded capital expenditure or investments that are not in line with our expectations; or (3) the management undertakes significant shareholder distribution that exceeds our expectations,” said Sukkawala.

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