KUALA LUMPUR (Feb 26): S&P Global Ratings said Axiata Group Bhd's strategic review of its regional telco portfolio could weaken its portfolio diversification.

In a statement last Friday, the rating agency said further loss of direct control over key subsidiaries' cash flows could dent the telco's earnings quality, despite ongoing efforts to strengthen its competitiveness in various markets.

“We view Axiata's portfolio diversification as a particularly key credit strength compared to its peers.

“Should the review increase earnings concentration and diminish Axiata's control of cash flows of its key subsidiaries, it could weigh on the company's earnings quality and our assessment of its stand-alone credit profile (SACP),” it said.

S&P said ongoing transactions under review include the merger of Sri Lankan subsidiary, Dialog Axiata PLC with Bharti Airtel Ltd's Sri Lankan operations.

It said Axiata also plans to seek a new strategic partner for Edotco Group Sdn Bhd, its tower subsidiary.

“We expect this to become more likely because of Edotco's plans to exit its Myanmar operations, which were a drag on equity raising,” it said.

S&P said these transactions come amid Axiata's (BBB/Stable/--) exit from its operations in Nepal, which had been contributing about 6% of the company's earnings before interest, taxes, depreciation, and amortisation (Ebitda).

It said the exit will reduce ongoing regulating uncertainties and tax disputes in the country.

“The portfolio review could strengthen Axiata's competitiveness in some of its operating markets but, in our view, it will be insufficient to offset the weakened diversification and control of its cash flows.

“That said, the proposed merger in Sri Lanka will alleviate competitive pressure and strengthen Axiata's position in the country as the largest mobile service provider. Infusion of new equity will also fund Edotco's growth and reduce Axiata's leverage,” it said.

S&P expects the competitiveness of Axiata's Indonesian operations to improve.

It said the delayering of the Indonesia operations into serveco and fiberco will facilitate fixed mobile convergence in XL Axiata Tbk PT (serveco).

The agency said this will enable service bundling and increase customer stickiness. Link Net Tbk PT (fiberco), with a new focus on wholesale and fiber rollout, could expand its service to other internet service providers, raising its earnings potential.

“In our view, Axiata's leverage will remain higher than historical levels of 2.5x over the next 24 months.

“We estimate the company's adjusted debt-to-Ebitda ratio to be about 2.9x-3.2x in 2024 and 2025, a similar level as about 3.1x in 2023. If leverage remains above 3x, it could weigh on Axiata's SACP,” it said.

S&P added that its base case has not considered potential proceeds and equity infusion from the ongoing transactions.

“Axiata intends to keep its net debt-to-Ebitda ratio below 2.5x (based on its own calculation), from about 3.4x at end-2023.

“Further depreciation of the Malaysian ringgit (which is down 7.3% against the US dollar in the past year) could hinder the company's deleveraging efforts.

“This is given 59% of company's borrowings are denominated in US dollar as of end-2023, of which 63% are unhedged,” it said.