SLT will no longer be dragged by State ownership: Fitch

• Maintains SLT’s ‘A(lka)’ National Long-Term Rating on Rating Watch Positive (RWP)
• Points out SLT’s ratings are currently constrained by its parent’s weak credit profile
• Says extent of rating upside following the proposed disposal will depend on the credit profile of the new parent

The rating of Sri Lanka Telecom (PLC) will no longer be dragged by the state ownership following the sale, Fitch Ratings said yesterday, as it announced it has maintained the telco’s ‘A(lka)’ National Long-Term Rating on Rating Watch Positive (RWP).

According to the rating agency, the RWP reflects the potential rating upside from the removal of linkages with SLT’s parent, the Sri Lankan government (Long-Term Local-Currency Issuer Default Rating (IDR): CCC-). The government is in the process of selling its 50.2 percent stake in the company. 

Fitch said it will resolve the RWP when the proposed disposal becomes practically unconditional, which may take longer than six months, based on the government’s 2Q24 target date for the definitive agreements. 
SLT’s ratings are currently constrained by its parent’s weak credit profile under Fitch’s Parent and Subsidiary Linkage (PSL) Rating Criteria. SLT’s Standalone Credit Profile (SCP) is stronger than that of the state, reflecting the company’s market leadership in fixed telephone and broadband services, second-largest share in mobile, ownership of an extensive optical fibre network and a stronger financial profile. 

“The extent of rating upside following the proposed disposal will depend on the credit profile of the new parent, the strength of linkages according to our PSL criteria, and the proposed funding structure,” Fitch Ratings said.
Progress on the government stake disposal continues, with the International Finance Corporation (IFC) appointed as transaction advisor. The timeline released by the government’s State-Owned Enterprise (SOE) Restructuring Unit targets the signing of definitive agreements with the successful bidder by end-2Q24. 

“We believe the government will follow through with the disposal, as SOE restructuring is an integral part of the International Monetary Fund’s financial support programme for Sri Lanka,” the rating agency said.
SLT’s ‘A(lka)’ rating reflects its relative credit strength compared with national peers, but is below its SCP due to the drag from state ownership. 

Further, the agency said it forecasts the Fitch-defined EBITDA margin to recover to 31 percent in 2024, driven by measures to control operating costs, especially utility and maintenance costs. 

In addition, the growth in fibre broadband subscribers is expected to contribute to margin improvement starting from 2024 “We forecast that the EBITDA margin will recover to 33 percent – 34 percent by 2025, the level before the sovereign default crisis. The 2023 EBITDA margin likely declined to around 27 percent (2022: 34 percent) due to higher cost inflation and the sharp depreciation of the Sri Lankan rupee,” Fitch said. Further, capex / revenue to decline to 20 percent in 2024 as SLT has completed fibre deployment and will rationalise its capex by prioritising critical projects. 

Fitch said the company is likely to remain cautious on capex until the economy and consumer purchasing power recover significantly.  SLT is also expected to remain cautious on shareholder returns before the company achieves a more substantial recovery in pre-tax profit, which is forecasted to happen in 2025. SLT is likely to distribute limited dividends in 2024, as the entity is expected to generate a pre-tax loss for 2023 due to declining profitability and high interest expense.

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