Ratings firm Standard & Poor’s (S&P) has recently updated its ratings for most of South Africa\u2019s mobile operators, with Vodacom set to retain a clear leading position in the domestic market over the next twelve months.<\/p>\n
S&P, however, also highlights the increasingly challenging market conditions in SA for Vodacom.<\/p>\n
\u201cWe expect higher competition in the coming year as Telkom and Cell C are rolling out or upgrading their networks and marketing aggressive pricing offers, in particular in data products,\u201d the ratings group said.<\/p>\n
S&P says it expects Vodacom\u2019s network investment to remain sizable, notably to facilitate the expansion of its transmission capacity and radio access networks in response to escalating data traffic.<\/p>\n
S&P stressed that it could lower the rating if the group\u2019s operating measures or business positions significantly weakened, or if the group introduced a more aggressive financial policy, which could lead to persistently weaker cash flow generation and credit measures.<\/p>\n
\u201cAdditionally, we could consider a downgrade if Vodacom\u2019s liquidity remained, over a lengthy period, below levels that we believe are adequate,\u201d it continued.<\/p>\n
\u201cGiven Vodacom\u2019s business risk profile characteristics, which include a strong market position in a competitive, mature market and international operations with weak credit quality, we are unlikely to raise the ratings in the medium term,\u201d S&P concluded.<\/p>\n
Cell C<\/strong><\/p>\n For Cell C, the ratings agency last month revised its outlook to stable, from a previous \u2018positive\u2019 position. While CEO of the group, Alan Knott-Craig, has been busy shaking up the market with a number of attractive offerings for mobile voice and data, S&P says that its affirmation of a ‘B-‘ rating reflects the group\u2019s opportunities but also the execution risks and business challenges of Cell C’s turnaround strategy.<\/p>\n \u201cWe still assess Cell C’s business risk as “weak” and its financial risk profile as highly leveraged,\u201d it said.<\/p>\n \u201cThe stable outlook reflects Standard & Poor’s expectations that Cell C will continue to receive timely financial support from its main shareholder to fund its activities and debt obligations, if needed,\u201d S&P said.<\/p>\n It expects that Cell C will continue to increase its customer base steadily, and reduce high churn rates. \u201cThis will be critical for achieving more rapid EBITDA growth, improving profitability, and reaching positive free cash flow in the coming years, before saturation of the South African market.\u201d<\/p>\n According to S&P, ratings upside could arise if Cell C can achieve material EBITDA growth-such as being on track to approach EBITDA of ZAR2 billion annually-improve profitability, and make significant progress toward generating positive free operating cash flow. \u201cThe company’s maintenance of sound medium-term liquidity prospects would also be an important consideration,\u201d it said.<\/p>\n Conversely, S&P says that a negative rating action is likely if Cell C’s liquidity deteriorates without any supporting measures from parent company Oger Telecom.<\/p>\n Telkom<\/strong><\/p>\n In June, S&P retained its negative outlook for Telkom and views the group\u2019s business risk profile as \u201cfair\u201d and its financial risk profile as \u201cmodest.\u201d<\/p>\n S&P says its outlook for Telkom reflects the risk of a one-notch downgrade over the next 12 months if continued strong pressure on Telkom\u2019s traditional fixed-line voice revenues, operating losses for mobile operations, and heightened competition were to result in a prolonged erosion of revenues and profitability.<\/p>\n \u201cThe surge in capex stands to depress Telkom\u2019s generation of free cash flow, which could be negative over the next two years. Combined with shareholder distributions, this may lead in turn to an increase in the company\u2019s leverage,\u201d the group said.<\/p>\n S&P says it could lower the rating on Telkom in the event of a further marked weakening in the company\u2019s business risk profile, its inability to sustain positive Free Operating Cash Flow (FOCF), or a durable decline in credit metrics to levels not commensurate with the current \u2018BBB\u2019 rating, notably adjusted ratios of gross debt to EBITDA in excess of 1.5x or funds from operations to debt at or below 50%.<\/p>\n \u201cWe could revise the outlook to stable if we anticipate stabilisation of the core fixed-line operations, maintenance of the EBITDA margin of at least 25%, pronounced progress in building a sizable and profitable mobile business, and if the company demonstrates its capacity to protect credit metrics in line with our rating expectations.\u201d<\/p>\n \u201cAn outlook revision to stable would also hinge on Telkom\u2019s maintenance of adequate liquidity, in particular through a lengthening of the debt maturity profile,\u201d S&P said.<\/p>\n MTN<\/strong><\/p>\n While S&P does not rate MTN, rival firm, Fitch Ratings has recently affirmed MTN Group\u2019s national long-term rating at \u2018AA-(zaf)\u2019 and national short-term rating at \u2018F1+(zaf)\u2019. It also provided a \u2018stable\u2019 outlook for the group.<\/p>\n The agency also affirmed MTN\u2019s wholly owned subsidiary, MTN Holdings senior unsecured rating at \u2018AA-(zaf)\u2019.<\/p>\n The affirmation is supported by MTN\u2019s 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.<\/p>\n It warns that political instability, country and regulatory risks continue to be the key constraining factors for MTN\u2019s ratings.<\/p>\n \u00a0Related articles<\/strong><\/p>\n Telkom retains negative outlook by S&P<\/strong><\/a><\/p>\n Fitch affirms MTN rating, cautions Turkcell threat<\/strong><\/a><\/p>\n