Fitch affirms and withdraws ratings of SLT

Fitch Ratings affirmed Sri Lanka Telecom PLC’s (SLT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B’. The Outlook is Stable. The agency has simultaneously withdrawn the ratings for commercial reasons.

Prior to the withdrawal, SLT’s IDRs were constrained by Sri Lanka’s IDRs of ‘B’ as per Fitch’s Government-Related Entities Rating Criteria, as the state holds a majority stake in SLT directly and indirectly and exercises significant influence on its operating and financial profile. 

SLT’s second-biggest shareholder, Malaysia’s Usaha Tegas Sdn Bhd at 44.9 percent, has no special provisions in its shareholder agreement to dilute the government’s significant influence over SLT.  Fitch sees SLT’s status, ownership and control by the Sri Lankan sovereign as ‘Strong’. 

The state’s ownership gives it significant influence over operating and financial policies. 

“We view the support record and expectations for the likelihood of state support for SLT as ‘Strong’, given its strategic importance in expanding the country’s fibre infrastructure. Historically, SLT has not required tangible financial support due to its healthy financial profile,” Fitch said.  

Fitch sees the socio-political implications of a default by SLT as ‘Moderate’ due to the presence of three other privately owned telcos. 

However, it could affect the fixed-line market because SLT acts as a policy company to invest in fibre networks across the island to support the government’s vision of fibre-based Internet for all households. 

Fitch also sees the financial implications of a default as ‘Strong’, as a financial default by SLT may have an impact on the availability and cost of financing options for other government-related entities.  

“We expect SLT to have negative free cash flow (FCF) during 2019-2020 (estimated 2018 negative FCF of Rs.2 billion-3 billion) as cash flow from operations may be insufficient to fund large capex plans to expand the fibre infrastructure and 4G mobile networks. 

We expect SLT’s 2019 capex to remain high, at around 28 percent-30 percent of revenue (2018 estimated: 30 percent), as it aims to complete its 4G population coverage to around 95 percent by end-2019. However, the management expects its capex/revenue to decline to around 18 percent-20 percent in 2019,” Fitch said.

The rating agency further expects SLT to continue to invest in expanding fibre coverage as it aims to connect about one million homes by 2020-2021, from the 70,000 homes currently enabled. 

SLT would typically need to lay fibre for at least two million homes for half of the households to be connected. Fitch expects SLT’s fibre investments to have low returns due to the country’s low broadband tariffs. Dividends are likely to remain around Rs.1.6 billion-1.8 billion in the next two to three years.  

Meanwhile, Fitch expects SLT’s revenue to grow by a mid-single-digit percentage during 2019-2020 (barring any tax shocks), driven by data and fixed-broadband growth. 

“We expect 4G smartphone penetration to improve from the current 25 percent with the proliferation of cheaper Chinese phones. 

Revenue rose strongly by 6.5 percent in the first nine months of 2018, driven by fixed broadband and mobile usage after a temporary usage slump in 2017 due to higher taxes on voice and data.  We expect the government’s recent announcement on the removal of floor rates for voice call charges to have only a limited impact on growth,” Fitch noted.