Smartfren’s long-term rating pegged at CCC+ despite recent subscriber gains

17 Sep 2020

Fitch Ratings Indonesia has reaffirmed struggling telco PT Smartfren Telecom (Smartfren’s) long-term rating at CCC+, which it notes reflects uncertainty over its ability to ‘obtain external liquidity to cover CAPEX and debt repayment needs’, despite ‘significant improvement’ in its reported EBITDA margin and cash flow generation in 1H20, and a recent growth spurt – driven by its unlimited 4G data plan for IDR80,000 (USD5.4) per month – which lifted its subscriber base to 26 million by 30 June 2020. Nonetheless, the ratings agency remains wary of what it sees as Smartfren’s reliance on its ‘remaining undrawn committed facilities … to cover its cash shortfall in the next 18-24 months’ even as it plans to strengthen and deepen its 4G coverage, which currently lacks the operational reach of larger rivals such as Telkomsel, XL Axiata and Indosat Ooredoo, to drive uptake. Smartfren’s management is reportedly targeting subscriber growth of 6.5 million, 13 million and 14 million in each of the next three years, but Fitch’s ‘annual additional subscriber assumption is much lower’ while it also warns that the telco’s decision to target the lower-income demographic with its ‘best-value’ plans will see blended ARPU declining to IDR27,200 by 2023.

‘Smartfren will require substantial additional subscribers to raise its economies of scale to boost profitability and cash flow generation materially. Smartfren’s reported EBITDA margin (pre-PSAK73 adjustment) improved to 31.5% by end-June 2020 from 19.8% at end-December 2019, although still lagging behind XL’s and Indosat’s 50% and 40%, respectively, due to its lower subscriber base. Sustaining the growth of its subscriber base will hinge on its ability to continue offering attractive packages and the expansion of its 4G network. Adding fewer subscribers than we expect may weaken Smartfren’s coverage as the lower profit may not adequately cover its intensive investment,’ the report claims.

Indonesia, Smart Telecom (Smartfren)