Fitch Ratings has affirmed
A full list of rating actions is at the end of this commentary.
Kcell's ratings benefit from its moderate to strong parent-subsidiary linkage to its parent,
Key Rating Drivers
Sound Financial Performance: Kcell demonstrated solid operating results in 2021 and 9M22. Its revenue grew by 12.3% in 2021 and 18.4% in 9M22 and the Fitch-defined EBITDA margin was sustained at 37-38%. Service revenues increased by 10.7% in 2021 and 12.3% in 9M22, compared with only 1.8% in 2020. Acceleration in service revenues growth in 9M22 was supported by the expiration of a three-year tariff freeze in
Market Share Attrition: Kcell is the second-largest mobile operator in
Abating Competition: Competition has become more rational in 2022, evidenced by the absence of inexpensive unlimited data packages and price increases for tariffs by all three mobile network operators. We expect the mobile operators to compete by network quality or other services offers rather than pricing. VEON has invested extensively in its network in 2019-2021 and will likely want to monetise its investments.
5G Spectrum Auction Uncertainties: 5G spectrum auction in
High Capex, Negative FCF: Following a period of underinvestment, we anticipate Kcell's cash capex to peak at 30-31% of revenues in 2022-2023, gradually decreasing to 23% in 2025. High capex will be driven by the need to upgrade infrastructure and roll out of the integrated network with its sister company. Fitch assumes in its forecasts that a 5G spectrum payment will be made in a lump sum in 2022. As a result of high capex, we expect free cash flow (FCF) to be negative in 2022-2023.
Low Leverage, Financial Flexibility: Kcell's funds from operations (FFO) net leverage was 0.6x at end-2021. Fitch expects it to increase to about 0.7x in 2022-2023 as a result of significant capex investments. This gives the company more than two turns of leverage headroom and provides sizeable financial flexibility. Its dividend policy of paying between 50% and 100% of FCF (defined by Kcell as a sum of operating and investing cash flows) helps align shareholder distributions with the company's longer-term goals.
PSL-Driven Rating: We rate Kcell using a top-down approach, one notch below Kaztel's consolidated credit profile. We assess the overall parent-subsidiary linkage between Kcell and its parent Kaztel as moderate to strong, with the parent the stronger entity, given Kcell's 'bb' SCP.
High Strategic Incentive: We view the strategic incentive (as defined by our Parent and Subsidiary Linkage Rating Criteria) for Kaztel to support Kcell as high. Kcell contributes roughly 30% of Kaztel's consolidated revenues and control over Kcell allows Kaztel to have leading market positions in the Kazakh mobile market. We expect that the mobile segment will be one of Kaztel's major growth drivers.
Medium Operational Incentive: We assess operational incentive as medium. This is supported by considerable cost savings at a group level, counterbalanced by the absence of common management and sharing of the same brand. Kcell lacks ubiquitous network coverage across
Low Legal Incentive: We view legal incentives as low, given the lack of parental guarantees on a significant amount of the Kcell's debt. Only 4% of Kcell's debt (excluding leases) was guaranteed by Kaztel at
Derivation Summary
Kcell's peer group includes Turkish mobile-focused operator
Kcell's ratings benefit from its moderate to strong parent-subsidiary linkage to its parent Kaztel; its SCP is 'bb'. Similar to Tcell and
Key Assumptions
Medium double-digit revenue growth in 2022, easing to high to medium single digits in 2023-2025
Fitch-defined EBITDA margin at 37-38% in 2022-2025
Working capital cash outflows of
Cash capex at 31% of revenues in 2022 (including spectrum payments), 30% in 2023 and gradually easing to 23% in 2025.
Dividends at
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of Kaztel, provided parent-subsidiary linkage is unchanged
Stronger linkage to Kaztel, including through shareholder funding or guarantees provided by Kaztel on a significant amount of Kcell's debt
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Kaztel, provided parent-subsidiary linkage is unchanged
Weaker linkage to Kaztel, including from higher FFO net leverage above 3.3x on a sustained basis (equivalent to net debt-to-EBITDA sustainably above 3.1x) without a clear path for deleveraging and no commitment by the parent to provide financial support
The sensitivities for Kaztel's rating can be found at
www.fitchratings.com/research/corporate-finance/fitch-affirms-kazakhtelecom-at-bbb-outlook-stable-08-12-2022
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Satisfactory Liquidity: We view Kcell's liquidity as satisfactory, with
Issuer Profile
Kcell is the second-largest mobile operator in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Kcell's ratings are linked to its parent Kaztel.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
(C) 2022 Electronic News Publishing, source