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RAM Ratings assigns final AA3/stable rating to BGSM Management's proposed Sukuk.

RAM Ratings has assigned a final 3/stable rating to BGSM Management Sdn Bhd's (BGSM Management) proposed MYR 10 billion Sukuk Musharakah Programme (2013/2043). RAM's assessment is based on BGSM Management's cumulative debt of up to MYR 7.25 billion with the first drawdown to be used to refinance the outstanding Sukuk, USD term loan and/or bridging loans of Binariang GSM Sdn Bhd (BGSM); the rating will be reassessed should there be any material deviations to BGSM Management's total debt drawdown.

BGSM Management is an investment-holding company set up to facilitate the debt restructuring of BGSM. BGSM Management will own an indirect 65 per cent-stake in Maxis Berhad (Maxis). RAM's analysis of BGSM Management focuses on the credit fundamentals of its sole operating subsidiary (Maxis) given that it is the only source of cashflow for the fulfilment of all the financial obligations on the proposed Sukuk. Critical considerations include the financial covenants imposed on BGSM Management to limit distributions/advances to shareholders/related companies. These covenants are aimed at decoupling BGSM Management and its subsidiaries from any adverse financial implications from its parent (Maxis Communications Berhad or MCB), given the poor showing of Aircel Limited - BGSM Management's sister company owned by MCB.

Meanwhile, Maxis is one of the 3 major incumbents in the Malaysian mobile telecommunications industry that offers voice and broadband services through its wireless and fixed telephony networks. Despite its weaker performance in recent years, it still maintained 38.4 per cent of the industry's MYR 17.9 billion revenue and 41.2 per cent of the industry's MYR 8.3 billion operating profit before depreciation, interest and tax for 9M 2013. To enhance its position, Maxis embarked on an internal reorganisation in the second half of 2013. This was followed by the appointment of Morten Lundal as CEO on 1 October 2013. RAM derives comfort from the appointment of the new CEO, who is vastly experienced and boasts a laudable track record in the telecommunications industry. Plans are afoot to refresh the Maxisand Hotlink brands and to improve distribution activities. Nonetheless, we note that it will take time for the new strategies to come to fruition.

RAM derives substantial comfort from Maxis' robust cashflow-generating ability, underpinned by its strong profitability. Supported by Maxis' financials, RAM expects BGSM Management's group-level funds from operations debt coverage (FFODC) and free operating cashflow debt coverage (FOCFDC) ratios to range around 0.27-0.31 times and 0.20-0.23 times, respectively, between fiscal 2014 and 2016 - a stark improvement over BGSM's group-level FFODC of 0.11 times in FY Dec 2011 (as it was weighed down by Aircel). Given the steady annual dividends it will receive from Maxis, BGSM Management (company level) is expected to register a commendable FFODC of 0.32-0.43 times for the same period.

The Malaysian cellular telephony sector is rife with competition. Given the high mobile penetration rate of 146.1 per cent as at end-September 2013, telecommunication companies face decelerating subscriber growth, moderate price competition and hefty marketing expenses that will further compress their margins. Nonetheless, the broadband segment still has ample room for growth, in line with the current voice-to-data shift and underscored by the still-low local household and population broadband penetration rates of 67.2 per cent and 22.5 per cent, respectively.

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Publication:CPI Financial
Date:Dec 24, 2013
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