S&P revises Telkom outlook to negative

Ratings firm Standard and Poor’s (S&P) has revised telecommunications group Telkom SA’s (TKG) outlook to negative, citing its weakening business profile.

Its “BBB” long-term corporate credit rating was affirmed.

“We expect the downward trend in fixed-line voice traffic, steady access line losses, and operating losses for mobile operations to lead to sustained sales and profitability erosion for South African telecommunications provider Telkom,” S&P said.

“We have accordingly revised our assessment of Telkom’s business risk profile to “fair” from “satisfactory” under our criteria.

We have also revised our assessment of Telkom’s financial risk profile to “modest” from “intermediate.”

“We are revising our outlook on Telkom to negative from stable, and affirming our ‘BBB’ long-term rating,” the ratings group said.

It noted that the negative outlook reflected its view that continued business pressures and projections for a peak in capital expenditures could result in prolonged very weak free cash flow generation and credit metrics no longer commensurate with the rating.

“Our reassessment of Telkom’s business risk profile reflects our opinion that projected steady revenue growth from its fixed-broadband and mobile services are unlikely to offset, over the next two years, the ongoing sharp downward trend in its core fixed-line voice revenues. We base our view on fixed-to-mobile substitution and rising pricing pressures from mounting competition, as well as reduced leased line revenues resulting from mobile operators’ increasing self-provisioning,” S&P said.

Importantly, S&P stressed that despite management’s ongoing focus on cost control, pressures on Telkom’s profitability were likely to persist over the next two years, given the sales erosion in the most profitable voice fixed-line segment, its high fixed-cost base, and likely continued operating losses for the mobile operations.

The negative outlook followed a revision of Telkom’s business risk profile to “fair” from “satisfactory” and reflected the risk of a one-notch downgrade over the next 18 months if the continuation of strong pressure on its traditional fixed-line voice revenues, operating losses for mobile operations, and heightened competition were to result in a prolonged erosion of sales and profitability, S&P said.

It added that the surge in capital expenditures stood to depress Telkom’s generation of free cash flow, which could be negative over the next two years, which, combined with shareholder distributions, could lead in turn to some increase in the company’s leverage.

“We could lower Telkom’s rating in the event of a further marked weakening in the company’s business risk profile, its inability to sustain positive FOCF, or a durable decline in credit measures to levels not commensurate with the current ‘BBB’ rating, notably adjusted ratios of gross debt to EBITDA in excess of 1.5x or funds from operations to debt at or below 50%,” S&P said.

It argued that it could revise the outlook to stable if it anticipated a stabilisation of the core fixed-line operations, maintenance of the EBITDA margin of at least 25%, meaningful progress in building a sizable and profitable mobile business, and if Telkom demonstrated its capacity to protect credit measures in line with rating expectations. “An outlook revision to stable would also be contingent on our expectation of the maintenance of adequate liquidity in particular with a lengthening of the debt maturity profile,” the ratings group said.

On Tuesday Telkom further advised that ratings agency Moody’s Investors Service downgraded its senior unsecured issuer rating to Baa2 from Baa1, and the national scale long term issuer rating to A2.za from A1.za.

The outlook on these ratings was stable, the group said.

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S&P revises Telkom outlook to negative