'Capex, dividends to offset telcos' margin erosion'

KUALA LUMPUR: Fitch Ratings expects margins of wireless telecommunication companies (telcos) in Southeast Asia to shrink but in Malaysia, this will be offset by growth and largely constant capital expenditure (capex) and dividends.

Overall, Southeast Asian telcos are expected to post broadly stable profits next year, Fitch said in a report yesterday.

It said telcos could suffer profit-margin erosion by as much as 150 basis points next year.

This is because consumers in the region are increasingly switching over to Internet data and using less of traditional voice and text services, it noted.

"Cash generated and credit metrics will be broadly stable or slightly improve, except in Thailand where large investments will increase leverage."

Fitch said fixed-line and broadband operator Telekom Malaysia Bhd has low ratings headroom. However, its operating margin will remain resilient as its growing high-speed broadband business and lower capex should ensure stable leverage.

In Indonesia, the credit rating agency expects the country's top four telcos to continue dominating the market and that their credit metrics will be stable.

Small, struggling telcos are likely to be forced into mergers to survive as the gap with the top four widens.

Barring acquisitions, the telco tower companies' leverage will improve as free cash flow rises due to growing earnings and low levels of capex maintenance.

In Thailand, private operators' exposure to legal and regulatory risks will decline as they migrate customers to the new third-generation (3G) licence system, which will overcome many of the weaknesses of the former second-generation concession system.

Technology upgrades to 3G should support growth in non-voice revenue and offset declining voice services.

A significant increase in capex for the 3G network will lead to deterioration in credit metrics.

However, Thailand's two largest mobile operators - Advanced Info Service Public and Total Access Communication Public - have sufficient headroom in their ratings.

In Singapore, Fitch expects profits of all three players to remain stable, driven by better data pricing that will offset the cost pressures of handset subsidies and higher pay-television content costs.

Capex will trend lower as fourth-generation investments are largely complete.

Singapore Telecommunications Ltd's (SingTel) leverage will remain stable as cash flow from operations will cover its capex and dividends.

Fitch forecasts that annual available cash will be sufficient to fund SingTel's acquisition budget of S$2 billion (RM5.1 billion) over three years.

In the Philippines, operating margins will continue to deteriorate due to unlimited tariff offerings, larger handset subsidies and substitution of data for voice and text services.

Nevertheless, more data adoption should lead to an increase in revenue by mid-single-digits and lower capex should ensure positive free cash flow and stable credit profiles for both the main operators - Philippine Long Distance Telephone Co and Globe Telecom Inc.

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