SLT’s negative free cash flow projected to rise amid rising capex requirement

Fitch Rating expects Sri Lanka Telecom PLC’s (SLT) negative free cash flow (FCF) to continue during the current financial year as cash flow from operations is likely to be insufficient to fund rising capex requirements to expand the firm’s planned fibre infrastructure and 4G

mobile networks. “We expect SLT’s 2019 capex to remain high, at around 28-30 percent of group revenue (2018: 26 percent), as it aims to complete its 4G population coverage to around 95 percent by end-2019.

However, management expects its capex/revenue to drop to around 18-20 percent in 2019,” Fitch Ratings stated in its latest credit rating review of SLT.

SLT had FCF of Rs.3.4 billion during last financial year. SLT is expected to continue investments in expanding fibre coverage as it aims to connect about one million homes by 2020-2021, from the 70,000 homes currently enabled. Despite heavy investments into expanding fibre coverage, the rating agency projects low returns due to the country’s low broadband tariffs.
“SLT would typically need to lay fibre for at least two million homes for half of the households to be connected. We expect 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 to Rs.1.8 billion in the next two to three years.”

Fitch also projected 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 and further supported by recent reduction of telecommunication tariffs by 25 percent.

“We expect 4G smartphone penetration to improve from the current 25 percent with the proliferation of cheaper Chinese phones. Revenue rose strongly by 7.5 percent in 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 to reduce tax on telecommunication tariffs by 25 percent to support top-line growth.”

Fitch has revised the Outlook on Sri Lanka Telecom PLC’s (SLT) National Long-Term Rating to Negative from Stable and affirmed the rating at ‘AA+(lka)’ while affirming the National Ratings on SLT’s outstanding senior unsecured debentures at ‘AA+(lka)’.

The rating action follows Fitch’s recent revision of the Outlook on Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Negative from Stable amid concerns on the fiscal front. However, the rating agency noted that SLT’s unconstrained standalone credit profile is stronger than that of the Government of Sri Lanka, reflecting the company’s market leadership in fixed-line services and second-largest position in mobile, along with its ownership of an extensive
optical-fibre network.