Taking a cue from the downgrade of South Africa long-term foreign currency rating from ‘BBB-‘ to ‘BB+, Telkom SA is yet another South African company to receive its own share.
S&P said in its latest ratings opinion on the company that it has changed Telkom SA’ outlook to negative from stable on
S&P has further advised that the rating review reflects its view of potentially weakening economic conditions as well as political and institutional uncertainty in the country in the next year, which could in turn affect Telkom’s creditworthiness.
The agency however notes Telkom’s market leadership position as the incumbent telecom provider in the fixed-line voice market in the country as well as its growth prospects in its mobile, broadband and ICT solutions business which offsets the declining trend in fixed-line voice revenues.
Telkom’s global scale rating is now one notch above the country’s credit rating of BB+, negative. Telkom’s conservative capital structure combined with an expectation for single-digit net revenue growth and an average EBITDA margin of about 24% is what S&P cited as the primary reasons for maintaining our current rating position.
This is a positive acknowledgement to the turnaround strategy that the company embarked upon almost four years ago and the company will continue to actively manage its costs, cash and use of capital in the most efficient manner possible in the current difficult economic environment.
The negative outlook of Telkom by S&P reflects the possibility of a downgrade over the next year if the sovereign rating falls further and thereby impacting Telkom. However, having conducted a stress test to assess the company’s resilience under a hypothetical sovereign default scenario which includes stress on earnings and a devaluation of the South African rand, the agency limits the differential to one notch.
The company’s rating outlook could, in future be revised to stable if similar action on South Africa’s rating was revised, or if a significant improvement in the company’s liquidity position and ability to withstand a sovereign default with a substantially greater cushion occurs.