Fitch Ratings has upgraded Orascom Telecom Tunisie (OTT) Long-term foreign and local currency Issuer Default ratings (IDR) to ‘BBB-‘ from ‘BB+’. The Outlooks on both ratings are Stable. Fitch has also upgraded OTT’s National Long-term rating to ‘A+(tun)’ with a Stable outlook from ‘A(tun)’.
OTT’s ratings reflect its free cash flow (FCF) generation capability and strong credit profile which are driven by the company’s elevated operating profitability and its leading position in the Tunisian market. OTT was the market leader at end September 2008, under its popular Tunisiana brand. Continuing strong ability to generate cash, and further improvement in leverage metrics to the 0.5x net debt to EBITDA level at FYE08 from the FYE07 level of 0.95x have been positive triggers for the upgrade. In terms of liquidity, Fitch notes that the company had short-term debt of TND107m at Q308 versus a cash position of TND83mn. Fitch also believes that the company’s FCF generation capability in 2009 will be adequate to cover any short-term financial debt.
The Stable Outlooks reflect Fitch’s expectation that OTT will continue its strong operating performance in 2008-09, with a 53% EBITDA margin recorded in 9M08, and take a measured approach to capital expenditure related to any broadband ventures or a possible 3G license to be awarded in 2009-10.
OTT’s EBITDA margin increased from 49.8% in FY07 to 53% at 9M08, benefiting from an expanded subscriber base and operational growth. Gross debt decreased to TND348m at Q308 from TND422 at YE07. At year-end 2008 (YE08), management expects that the total number of mobile subscribers will reach 8.4 million, with the Tunisian market recording a mobile penetration rate of around 80%.
Fitch expects mobile subscriber growth to slow down considerably in 2009 as expected in a more mature market.
Currently, Orascom Telecom Holding (OT) – (ORTE) and Wataniya of Qtel (‘A+’/Stable) each own 50% of OTT and possess equal rights in managerial control.
Fitch views both shareholders as committed to the strategic development of the business. However, the agency also notes that OTT’s ratings are based on the stand-alone performance and financial profile of its Tunisiana-branded mobile business. The ratings also factor in the expectation that the business will continue its current dividend policy, with a max payout ratio of 75% in 2009 and beyond to its shareholders.
Though dividend distribution remains a concern, the company management’s dedication to retire debt early in 2007-9M08 makes the risk of special dividends less likely. The management aims to reduce leverage in the mid-term and the company may reach a net cash position by 2010 if operational performance goes according to plan.
Fitch expects OTT’s strategic focus to remain on the mobile segment, and does not expect the company to make significant international acquisitions. Fitch expects intensified competition after the possible entry of a third operator by Q110, which may lead to a significant decline in market share, leading to considerably lower operating margins and deterioration of the leverage metrics of the company. This would be negative for the rating in the long-term.
