Fitch Ratings, a global credit rating agency, confirms the Long-Term Issuer Default Rating (IDR) of Kcell at 'BB+' with a Stable Outlook. The rating reflects the telecom company's close ties to its parent, Kazakhtelecom (Kaztel, BBB-/Stable), and its Standalone Credit Profile (SCP) of 'bb.'
The one-notch rating difference between Kcell and Kaztel emphasizes Kcell's status as a publicly traded company with significant minority ownership. It also underscores the commitment of the parent company to maintain Kcell as a distinct entity with minimal parental guarantees.
The rating agency anticipates a decline in Kcell's credit metrics due to heightened capital requirements, increased interest, and dividend payments. Fitch expects the EBITDA net leverage to rise to 2.4x-2.9x in 2024-2026. Despite this increase, the leverage remains below the negative sensitivity threshold of 3.1x, albeit with limited headroom. The agency also foresees a weakening EBITDA interest cover from 2024.
Key Rating Drivers
- Increasing Leverage: Fitch projects a rise in Kcell's EBITDA net leverage, reaching 1.3x in 2023 and escalating to 2.4x-2.9x in 2024-2026. The company's credit metrics are expected to be impacted by substantial capital expenditures, 5G spectrum acquisition payments, and reinstated dividend payments.
- Substantially Higher Capex: Kcell's capital expenditures are set to increase significantly, reaching 75% of revenue in 2023 and remaining high at 25%-35% in 2024-2025. This surge is attributed to the development of 4G infrastructure and the rollout of its 5G network, following the acquisition of relevant spectrum.
- Steady Market Position, Some Attrition: Kcell, the second-largest mobile operator in Kazakhstan, retains around 30% subscriber market share. However, its market share has gradually declined due to underinvestment in 4G infrastructure. Investments in network upgrades and 5G rollout are expected to support its market positions.
- EBITDA Margin Pressures: Fitch expects a decline in the EBITDA margin to 35.9% in 9M23 from 37.6% in 2022. The full-year impact of increased fees for spectrum and higher personnel costs are contributing factors. The agency anticipates a further decline to 30% in 2024.
- Evolving Regulatory Environment: Changes in the regulatory environment in Kazakhstan, including the entry of a fourth mobile operator and potential changes in Kcell's ownership, pose uncertainties and may impact the company's competitive landscape.
- Another 5G Auction Raises Uncertainty: An upcoming 5G spectrum auction in Kazakhstan may pose challenges for Kcell, with potential additional spectrum expenses and associated 5G network rollout requirements.
Financial Implications and Assumptions
Fitch envisions negative free cash flow generation for Kcell in 2023-2024 due to high capital expenditures, increased interest payments, and reinstated dividend payments. The agency expects Kcell to return to positive free cash flow from 2025, supported by growing EBITDA and lower capital expenditure requirements.
Liquidity and Debt Structure
Kcell's liquidity is assessed as comfortable in the short to medium term. With cash and cash-equivalent balances, investments, and undrawn revolving credit facilities, the company is well-positioned to cover its debt maturities until end-2025. However, additional debt may be required to finance the expected negative free cash flow.
Kcell, the second-largest mobile-only operator in Kazakhstan, holds a significant share of the country's telecom market. While it faces challenges, including declining market share and heightened capital expenditures, the company's strategic ties to Kaztel and its role as a key player in the mobile segment contribute to its overall credit profile.