Struggling telecommunications operator Telkom has suffered another blow after ratings agency Standard & Poor’s downgraded its credit rating on Tuesday, warning that the continued decline in its fixed-line business and losses in mobile will result in further profit erosion.
S&P cut Telkom’s credit rating to BBB- from BBB. The move comes two months after another ratings agency, Moody’s, cut its rating of the company. The downgrades may make it more difficult and expensive for Telkom to raise debt.
A credit rating involves the evaluation of the credit worthiness of a debtor. A BBB- rating is one level above “junk-bond” or noninvestment grade status. S&P says its downgrade reflects its expectations of Telkom’s “gradual and sustained weakening of operating performance”.
“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,” S&P says. “We base our 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.”
S&P says the downward trend in Telkom’s “highly profitable” fixed-line voice business and its high fixed cost base, coupled with operating losses at its start-up mobile operations, will further affect its profitability over the next two years.
“This, combined with a projected surge in capital expenditures, could result in sustained very weak free cash-flow generation. The stable outlook reflects our expectations of a low- to mid-single-digit decline in sales from Telkom’s core fixed-line business, gradual reduction of mobile operating losses, and the maintenance of a solid capital structure and conservative financial policy over the next two years.”
In addition, S&P says Telkom’s capital expenditure plans will dampen Telkom’s ability to generate free cash, which could be negative between 2013 and 2015.
Although it believes it’s unlikely to happen in the next two years, S&P warns that it could again lower the ratings on Telkom “in the event of a more significant weakening in the company’s business risk profile than we currently anticipate”.
“We believe that ratings upside is unlikely 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.”
Telkom’s share price was trading down by 0,5% in midafternoon trading on the JSE on Tuesday. In the past year, the counter has shed nearly half of its value. — (c) 2012 NewsCentral Media
- See also: What Moody’s cut means for Telkom