Telkom’s share price on Wednesday closed 6.07% higher at R28.64 on the JSE after it alerted investors that Moody's Investors Service said its outlook “remains stable” and said it expected that telecom firm’s credit metrics would recover over the next 12-18 month .
The credit rating agency affirmed the telco’s Ba2 corporate family rating (CFR). It downgraded Telkom’s national scale rating (NSR) CFR to Aa2.za from Aa1.za., but the Baseline Credit Assessment (BCA) of ba2 was affirmed.
Moody's said the downgrade of the NSR reflected that Telkom's rating was now weakly positioned at the Ba2 rating level, particularly compared to other Ba2-rated South African companies.
Moody's said Telkom’s adjusted Ebitda (Earnings before interest, taxes, depreciation, and amortization) declined by 19% during the financial year that ended March 2023 and did not recover in the six months that ended September 2023.
At the same time the company's debt increased by 25% over the 18 months from March 2022 to September 2023 to fund negative free cash flow.
“Combined with rising interest rates that have increased the company's weighted average cost of debt, including leases, to 8.5% for the 12 months that ended September 2023 (September 2023 LTM) from 7.15% as of March 2022, this has led to a 54% increase in interest expense and a weakening of the (Ebitda – capex) / interest expense ratio to 1.0x as of September 2023 LTM, down from 2.4x 18 months earlier,” it said.
Moody's said it deemed an Ebitda – capex / interest ratio below 2x as weak for Telkom's Ba2 rating, even though it was partially mitigated by debt/ Ebitda leverage of 2.2x as of September 2023 LTM, which remained adequate despite weakening from 1.5x 18 months earlier.
The rating agency expected that Telkom's Ebitda would recover to around R11 billion over the next two years from R9.6 bn as of September 2023 LTM thanks to cost saving measures and the normalisation of expenses from the expansion of the postpaid book in financial year 2023.
At the same time the company's debt/ Ebitda and interest expense would reduce as the company had announced it would use some of the proceeds from the planned disposal of Swiftnet, Telkom’s masts and towers business, to reduce debt and interest expense.
Swiftnet is estimated to be worth R8.7bn and owns a portfolio comprising 6200 towers across South Africa. Telkom has said it expects the process to be completed by 2025.
SA government
Moody’s also explained that Telkom fell under Moody's government related issuer methodology given its 40.5% ownership by the government of South Africa, which is Ba2 stable.
“The link between the company and the government is reflected by Moody's assumption of 'High' default dependence and 'Low' extraordinary support and results in no uplift to the BCA of ba2, which is in line with the rating of the government of South Africa,” it added.
Moody’s said Telkom's BCA of ba2 was supported firstly, by the company's leading market position in South Africa's fixed-line business and operator of the largest fibre network in the country; and, secondly, by adequate financial policies with moderate, albeit weakening debt/ Ebitda leverage of 2.2x for the September 2023 LTM period.
However, the rating was constrained by not only the operational concentration in South Africa and exposure to the country's economic, social, political, legal and regulatory environment; but also the company's position as the third largest operator in a highly competitive South African mobile market.
Ahead of Telkom is mobile giants Vodacom, in top spot, and MTN, in second place.
Furthermore, Moody’s pointed to the low growth prospects with continued, albeit slowing decline of fixed line business and mature mobile market in South Africa.
Stable outlook
The stable outlook reflected Moody's expectation that Telkom's credit metrics would strengthen again over the next 12-18 months, and that in particular Ebitda – capex/ interest expense will trend towards 2.0x, while debt/ Ebitda would trend below 2.0x.
However, Moody’a also flagged factors that could lead to an upgrade or downgrade of the ratings.
Moody's said it would consider an upgrade if operating performance sustainably improved, Ebitda – capex/ interest expense remained above 2.0x and debt/ Ebitda sustainably remains below 2.0x, both on a sustainable basis. An upgrade would also be conditional upon an upgrade of the sovereign rating of South Africa.
“Moody's would consider a downgrade if (Ebitda– capex) / interest expense remains close to 1.0x for a prolonged period of time or debt/ Ebitda sustainably remains above 2.5x. Telkom's ratings are also likely to be downgraded in case of a downgrade of South Africa's sovereign ratings, although Moody's will continue to monitor resilience of Telkom's credit profile against macro-economic shocks,” it said.
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