Rating agency Standard & Poor's has downgraded Telkom's long-term corporate rating to the lowest investment grade level, on the back of declines in fixed-lines, mobile losses and its network expansion.
In a statement issued by the global agency, it says it is lowering its long-term rating on Telkom to BBB- from BBB, although it has retained its stable outlook, based on its expectations of a low- to mid-single-digit decline in sales from Telkom's core fixed-line business, the gradual reduction of mobile operating losses, and maintenance of a solid capital structure over the next two years.
In the first half of the year, Telkom's turnover was 1.5% lower, at R16.5 billion, while group operating expenses increased 1.6%, to R15.6 billion, most of which was due to the group's fixed-line business, where voice revenue continued to slow. However, the group reported a R222 million profit, slightly lower than last year's R233 million, but an improvement on the R179 million gain it made from continuing operations at year-end.
Standard & Poor's says its outlook on Telkom is stable, making it unlikely that another downgrade will be issued soon. Ratings affect the cost of credit and a company's ability to take out loans.
"Although unlikely in the next two years, we could further lower the ratings on Telkom in the event of a more significant weakening in the company's business risk profile than we currently anticipate, its inability to sustain positive FOCF [free operating cash flow] over the medium term, or a durable decline in credit measures to levels not commensurate with the current rating."
Standard & Poor's believes it is unlikely that Telkom's rating will be moved higher in the next two years, given the continued strain on the fixed-line business, and uncertainties concerning Telkom's future business performance in domestic mobile activities.
Shift to mobile
The downgrade reflects its expectations of Telkom's "gradual and sustained weakening of operating performance," says Standard & Poor's. "We believe that the likely steady revenue growth from its fixed-broadband and mobile services are unlikely to offset, over the next two years, the sharp downward trend in its core fixed-line voice revenues."
Standard & Poor's bases its view on the ongoing fixed-to-mobile substitution trend and rising pricing pressures from mounting competition, as well as a likely reduction in leased line revenues resulting from mobile operators' increasing self-provisioning.
"The downward trend in highly profitable fixed-line voice traffic, its high fixed-cost base and operating losses for mobile operations will likely further affect Telkom's profitability over the next two years," says Standard & Poor's. These factors, combined with a projected surge in capital expenditures, could result in sustained very weak free cash flow generation, it adds.
Telkom expects to spend between R18 billion and R21 billion over the next three years on upgrading its network to full IP.
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