Credit Opinion: Ooredoo Q.S.C.

Transcription

1 Credit Opinion: Ooredoo Q.S.C. Global Credit Research - 29 Feb 2016 Doha, Qatar Ratings Category Outlook Issuer Rating Ooredoo International Finance Limited Outlook Bkd Senior Unsecured Ooredoo Tamweel Limited Outlook Senior Unsecured MTN Moody's Rating Negative A2 Negative A2 Negative (P)A2 Contacts Analyst Phone Ivan Palacios/Madrid Douglas Rowlings/DIFC - Dubai Rehan Akbar/DIFC - Dubai David G. Staples/DIFC - Dubai Key Indicators [1]Ooredoo Q.S.C. 9/30/2015(L) 12/31/ /31/ /31/ /31/2011 Scale (USD Billion) $8.9 $9.1 $9.3 $9.2 $8.7 EBITDA Margin 39.4% 40.2% 43.6% 50.4% 51.1% Debt / EBITDA 3.7x 3.6x 3.4x 2.6x 3.0x FCF / Debt -2.6% 0.7% -1.3% 6.5% 1.5% RCF / Debt 18.1% 18.0% 18.3% 27.7% 24.2% (FFO + Interest Expense) / Interest Expense 5.3x 5.5x 5.9x 6.3x 5.9x (EBITDA - Capex) / Interest Expense 1.1x 1.5x 1.7x 3.1x 3.2x [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers» Strong liquidity profile underpinned by resilient Qatari market and strong market positions» Presence in growth markets with high geopolitical and currency risks

2 » Rationalisation strategy expected to reverse deterioration in credit metrics Corporate Profile Ooredoo Q.S.C., based in Doha, Qatar is an international telecommunications service provider, with activities in 15 markets across the MENA and Asia. Nearly 86% of its revenues are generated with wireless services and almost 75% of its revenues are derived from four markets: Qatar - where it is the incumbent integrated service provider; Indonesia (through its 65% holding in Indosat Ooredoo previously known as Indosat Tbk (P.T.), Ba1 stable); Iraq (64.1% in Asiacell Communications PJSC); and Algeria (74.4% in Ooredoo Algeria formally known as Wataniya Telecom Algerie S.P.A). For the last twelve months ended September 2015 group revenues amounted to QAR32.6 billion (USD8.9 billion) and profit before income tax to QAR2.2 billion (USD609 million). Rating Rationale The standalone credit worthiness, as expressed by the Baseline Credit Assessment (BCA) of baa2, reflects Ooredoo's (1) strong liquidity profile, as evidenced by a staggered maturity profile and ample bank availability and cash balances (QAR17.5 billion; or $4.8 billion as of 30 September 2015); (2) leading positions in its markets and; (3) solid cash flow generation in Qatar, Algeria and Oman. Ooredoo's BCA of baa2 is constrained by macroeconomic factors - such as lower GDP growth in core markets, depreciation of local currencies in markets where Ooredoo operates versus the US Dollar (against which the Qatari riyal is pegged) and competition have resulted in slightly lower revenue and profitability margin. Coupled with continued challenges faced by the greenfield investment in Myanmar and our expectation of subdued GDP growth in 2016 limit continued margin improvement. The A2 ratings take into account high support from the government of Qatar (Aa2 stable), as well as high dependence assumptions as per our rating methodology for Government-Related Issuers (GRIs). The government of Qatar (Aa2 stable) with its 68.6% shareholding, combining both direct and indirect interests, has established a track record of providing Ooredoo with equity to bolster its capital structure when required. Our high support input assumes continued ongoing and extraordinary financial backing by the government. DETAILED RATING CONSIDERATIONS STRONG LIQUIDITY PROFILE UNDERPINNED BY RESILIENT QATARI MARKET Qatar will continue to be a key market for Ooredoo generating around 30% of EBITDA. The market is also an important underpin for its baa2 BCA. This is predicated by its stable but gradual EBITDA growth trend with its US dollar pegged Qatari Riyal cash flow generation supporting its primarily US dollar and Qatari Riyal debt structure. We expect that the favourable market dynamics for the telecommunication sector in Qatar will continue despite the low oil price environment. This is premised by combined local and expatriate population growth supported by economic activity driven by significant public infrastructure spending ahead of Qatar hosting the FIFA World Cup Ooredoo further benefits from mainly number one and two market share positions in most of the countries where it operates. This in itself protects Ooredoo to a certain extent given the need for at least two players in telecoms markets where this is also supported by the underlying economics therein. Ooredoo aims to offer its customers the best quality network offering which relies upon the use of the latest technology available and where economically viable. Ooredoo's strong liquidity profile is supported by cash balances of around $4.8 billion, $824 million in availability under a committed revolving credit facility, and long-dated staggered debt maturities. This provides flexibility for the company to meet its liquidity and shock absorption capacity for the elevated business risk in some of the countries where it operates. The company also has a strong track record of proactively managing its liquidity by refinancing debt well in advance of its maturity at attractive rates. Liquidity is further supported by a discretionary dividend policy. This allows Ooredoo the necessary flexibility to balance the needs of its operations, overall liquidity buffers and the requirement for dividend flow from its shareholders. PRESENCE IN GROWTH MARKETS WITH HIGHER GEOPOLITICAL AND CURRENCY RISKS Indosat Ooredoo, as Ooredoo's second largest operation contributing around 25% of EBITDA, is exposed to

3 Indonesian Rupiah which at times may face periods of high volatility. This reduces EBITDA contribution to support primarily US dollar and Qatari Riyal denominated parent debt. Consequently, this will reduce EBITDA coverage relative to debt thereby weakening the overall group's credit profile as measured by Net debt/ EBITDA and EBITDA/ Interest Expense. At the same time margins could be pressured with the bulk of telecommunications infrastructure equipment being priced in US dollars resulting in a degree of compression. We however recognise the significant inroads that Ooredoo has made in converting operating company debt from US dollars into local currency. To date over 60% of this debt has been converted. However, the bulk of startup/acquisition costs for its international expansion were funded using debt at the parent company where EBITDA coverage from non US dollar linked operations, as mentioned earlier, will remain under pressure. Iraq, where we expect around 15% contribution to group EBITDA in 2016, is exposed to political and banking system instability. At the same time the ongoing conflict in certain parts of the country has lowered revenue generation which is expected to go lower still in In North Africa, both Algerian and Tunisian operations, are exposed to weakening local currencies versus the US dollar, where we expect EBITDA contribution of 13% and 6% from these operations, respectively, for Social tension and security risk present downside to revenue for Tunisian operations. Ooredoo Oman representing around 10% of EBITDA generation continues to grow, where there is no currency risk assuming that the Oman Rial peg to the US dollar remains in place. Similarly, Kuwait has shown a positive trend line with respect to EBITDA growth which we expect will continue and represent around 10% of group EBITDA generation in RATIONALISATION STRATEGY EXPECTED TO REVERSE DETERIORATION IN CREDIT METRICS Despite EBITDA margin remaining below of our downward guidance we expect that this will gradually improve overtime with Ooredoo continuing to deleverage from year to year. Ooredoo's strategy has shifted to that of rationalisation and organic growth away from inorganic growth. We expect that with this the company will increase its focus on existing operations to reduce costs, grow revenue organically and optimise capital expenditure spending. This is already showing early indications of positive transmission into margins as was seen in the EBITDA margin for the quarter ended 30 September Currency depreciation for some of Ooredoo's key operations including Myanmar, in our view, remain the key downside risk for the company's ability to reverse the deterioration in its credit metrics. Ooredoo's 3G only offering to the Myanmar market is adding subscribers at a slower rate compared to that of Telenor's 2G offering, however this was expected given the greater demand and market for lower ARPU 2G services. We will continue to closely monitor Ooredoo's plans for the operations and whether this will entail any further capital expenditure outlay beyond that originally planned. Liquidity Ooredoo's strong liquidity profile is underpinned by healthy cash balance and banking facility availability, totalling ca. QAR20.5 billion (USD5.6 billion), and a staggered debt maturity profile. The company has a track record of proactively refinancing upcoming debt maturities and keeping the debt profile medium to long dated. Funds from operation of ca. QAR10.9 billion (USD3.0 billion) in 2016, along with the available cash, provides a comfortable liquidity buffer to cover the cash requirements, including debt maturities of ca. QAR5.9 billion (USD1.6 billion), capex of ca. QAR7.1 billion (USD1.9 billion) and working capital requirement of QAR4.7 billion (USD1.3 billion). Rating Outlook The negative outlook reflects the deterioration in credit metrics which weakly positions the baseline credit assessment. We will continue to monitor Ooredoo's delivery on improving its EBITDA margins and the downward trajectory of Net debt/ebitda. What Could Change the Rating - Down Ooredoo's rating could come under downward pressure if (1) EBITDA margins are not restored to above 45%; (2) Net debt/ebitda is above 2.5 times for a prolonged period and; (3) the company records an RCF/debt ratio of less than 18%. Ratings could be lowered if government support assumptions were to be lowered.

4 What Could Change the Rating - Up Given the negative outlook on ratings an upgrade is more unlikely. Lower leverage, i.e., net debt/ebitda of less than 2.5 times on a sustained basis -- in combination with RCF/debt trending towards 25% and EBITDA margins in excess of 50% could result in an upgrade. Rating Factors Ooredoo Q.S.C. Global Telecommunications Industry Grid [1][2] Current LTM 9/30/2015 [3]Moody's Month Forward ViewAs of Feb Factor 1: Scale And Business Model, Competitive Measure Score Measure Score Environment And Technical Positioning (27% ) a) Scale (USD Billion) $8.9 Baa $9 - $9.5 Baa b) Business Model, Competitive Environment and A A A A Technical Positioning Factor 2: Operation Environment (16%) a) Regulatory and Political Baa Baa Baa Baa b) Market Share Aa Aa Aa Aa Factor 3: Financial Policy (5%) a) Financial Policy Baa Baa Baa Baa Factor 4:Operating Performance (5%) a) EBITDA Margin 39.4% Baa 40% - 45% A Factor 5: Financial Strength (47%) a) Debt / EBITDA 3.7x Ba 3.3x - 3.6x Ba b) FCF / Debt -2.6% Caa 0% - 3% Caa c) RCF / Debt 18.1% B 18% - 20% B d) (FFO + Interest Expense) / Interest Expense 5.3x Baa 5.5x - 6x Baa e) (EBITDA - Capex) / Interest Expense 1.1x B 3x - 3.5x Ba Rating: a) Indicated Rating from Grid Baa3 Baa3 b) Actual Rating Assigned A2 A2 Government-Related Issuer Factor a) Baseline Credit Assessment baa2 b) Government Local Currency Rating Aa2 c) Default Dependence High d) Support High e) Final Rating Outcome A2 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 9/30/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

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