Fitch Ratings has affirmed MTN Group’s national long-term rating at ‘AA-(zaf)’ and national short-term rating at ‘F1+(zaf)’. It also provided a ‘stable’ outlook for the group.
The agency also affirmed MTN’s wholly owned subsidiary, MTN Holdings senior unsecured rating at ‘AA-(zaf)’.
The affirmation is supported by MTN’s conservative leverage profile and high pre-dividend free cash flow generation despite increased competition in core Nigerian and South African markets, the ratings agency said.
“Fitch expects funds from operations (FFO) gross leverage to trend around 1x over the forecast period, which is well within the 2x maximum range set by the agency at the current rating level.”
Fitch said its rating case assumes some level of caution given the elevated country risks in the Middle East assets, which could potentially affect MTN’s cash up-streaming. “On this basis, Fitch excludes the consolidation of Iran and Syria in the group’s EBITDA but includes Iran as an associate dividend. Fitch calculates the group’s net cash position at ZAR1.8 billion in FYE11 (FY10: net cash of ZAR619 million), which excludes short-term investments of ZAR9.5 billion,” it said.
Fitch noted that political instability, country and regulatory risks continue to be the key constraining factors for MTN’s ratings. This was especially true for operations in Iran and Syria. “Fitch views the current uncertainty surrounding its license in Iran as a result of claims made by Turkcell (‘BBB-‘/Stable) as event risk. Based on the information available Fitch cannot predict the outcome of any claims against MTN. A final outcome that is detrimental to the company’s conservative financial profile could pressure the ratings,” the group warned.
Heightened levels of competition and reduced termination rates in key markets such as South Africa and Nigeria resulted in lower blended revenue per user (ARPU), Fitch further pointed out.
Domestically, subscriber net adds of 3.2 million in 2011 (2010:2.8 million) was above Fitch’s expectations. “However, Fitch believes similar subscriber growth is unlikely to be repeated on a sustainable basis. Nonetheless, the agency believes rising domestic smartphone penetration and mobile broadband income could marginally offset voice ARPU pressures in the medium term.”
In Nigeria, MTN reported subscriber net adds of 3.0 million in 2011 (2010:7.8 million) and Fitch forecast subscriber growth to moderate below previous levels of 2008-2010. Fitch added that it anticipates a slight contraction in EBITDA margin in 2012 for MTN Nigeria, driven by reduced interconnect margins and price competition. “Fitch believes the group’s ongoing cost focus and successful execution could relieve some operating margin pressures.”
MTN generated around 20%-21% free cash flow before dividends as a percentage of sales in FY11. “Fitch expects increased capital expenditure in 2012-2013 to limit pre-dividend free cash flow generation below current levels as the group focuses on data upgrades and increased network capacity. Nonetheless, Fitch does not expect a significant deterioration in credit metrics during this investment phase,” the ratings group concluded.