KUALA LUMPUR: Fitch Ratings has maintained Telekom Malaysia Bhd’s (TM) long-term foreign-currency issuer default rating (IDR) and its foreign-currency senior unsecured rating at “A-”, with a negative outlook.

In a note yesterday, the ratings agency said the negative outlook reflects the Malaysian sovereign’s A-/negative rating, due to its 56% ownership in TM (fundamental: 1; valuation: 0.9) as at January 2015, held through Khazanah Nasional Bhd, the Employees Provident Fund and Amanah Raya Trustees Bhd.

“The fixed-line incumbent continues to be strategically important to the government, and Khazanah exercises significant influence on TM’s strategic and operational decisions through board representation,” it said.

For 2015, Fitch expects TM’s 2015 funds flow from operations (FFO)-adjusted net leverage to rise to 1.8 times, compared with 1.7 times in 2014. The ratings agency said it may consider a negative rating action if its FFO-adjusted leverage rises above two times.

It forecasts TM to post FFO of RM3.1 billion in 2015, which could be insufficient to fully cover capital expenditure of RM2.6 billion and dividends of RM900 million.

“Consequently, in our opinion, there is little scope for deleveraging,” said Fitch.

On the telco’s earnings before interest, taxation, depreciation, amortisation, and restructuring or rent costs (Ebitdar), Fitch expects a margin of around 34% from 2015 to 2017, compared with 35% in 2014.

This is attributed to rising cost pressures and ongoing Ebitda losses of Packet One Networks (M) Sdn Bhd (P1), TM’s 55.3%- subsidiary.

“However, we believe that continuing growth in its fibre network-based services should continue to drive Ebitda expansion, albeit at a slower rate. TM has set a target for the non-wireless business to grow by 4% to 4.4% in 2015 in terms of revenue and Ebit (earnings before interest and taxation),” said Fitch.

Meanwhile, the ratings agency expects TM’s capital expenditure (capex) to rise to RM2.6 billion to RM2.8 billion in the medium term, compared with between RM2 billion and RM2.5 billion previously.

The extra capex will be allocated for long-term evolution expansion, as TM plans to invest approximately RM1 billion in P1, over three years.

For its fixed line business, TM plans to increase capex to 20% of revenue, from 16.3% in 2014, to fund copper network enhancements.

Looking ahead, Fitch said TM’s outlook could be upgraded to stable from negative if Malaysia’s outlook is revised to stable.

TM closed six sen or 0.83% down at RM7.17, bringing its market capitalisation to RM26.7 billion.

This article first appeared in The Edge Financial Daily, on March 6, 2015.