The credit rating assigned to PJSC «MegaFon» (hereinafter, the Company or MegaFon) is determined by the very large scope of the Company and by very high profitability, strong business profile, very strong liquidity position, and very high level of corporate governance. The rating is under pressure of the medium leverage and weak cash flow.
PJSC «MegaFon» is one of the largest telecommunications companies in Russia, it ranks second in terms of the number of subscribers and revenues among the mobile communications providers.
Key rating assessment factors
Very large scope and very high profitability. MegaFon ranks second in terms of the number of subscribers and revenues among the Russian mobile communications providers. In 2016, the Company’s revenue amounted to RUB 316.3 billion and FFO before fixed charges and taxes to RUB 139.1 billion. The subscriber base comprises 77.4 million people. The average revenue per user (ARPU) is lower than that demonstrated by peers, however, MegaFon remains one of the leaders among Russian federal-level communications providers in terms of margin, as FFO margin before fixed charges and taxes was 44% in 2016. The margin has declined since 2014, but we expect that, in 2017–2019, it will stabilize at the current level.
Strong business profile and wide geography of operations. MegaFon benefits from the state-of-the-art telecommunications infrastructure it owns. The Company operates the 130.6 thousand km long trunk network and 143.7 thousand base stations supporting various communications standards. As of end-2016, 4G network covered 82 regions and 65% population of the country. Currently, the Company is involved in 5G standard development and testing. MegaFon operations are focused on the mobile communications services, which comprise 83.4% of the 2016 revenue (including 27% mobile data services). Acquisition of Mail.ru Group Limited (MGL) may increase the diversification of Company’s operations.
Medium leverage is determined by a growing ratio of debt adjusted for operating lease to FFO before fixed charges, which equaled to 2.7x in 2016. In the beginning of 2017, the leverage continued to grow (which was caused by debt financing attracted to purchase MGL) but remained at a medium level. Taking into account the financials of MGL, the total debt adjusted for operating lease to FFO before fixed charges will be 2.3–2.4x in 2017–2019, according to ACRA estimates. We do not exclude a scenario of gradual declining leverage, provided that the Company shareholders observe a stricter dividend policy. In 2016, the ratio of FFO before fixed charges to fixed charges was 3.5x, which is medium. We expect a gradual increase of that ratio from 3.4x in 2017 up to 3.7x in 2019 (MGL included).
Very strong liquidity positions with weak cash flow. MegaFon’s liquidity is supported by low payments on debt obligations in 2017, with more than a half of the debt becoming due in five years and later. The liquidity assessment was also driven by significant cash balances on deposits. For MegaFon, as for the entire telecommunications sector, a program of vast capital expenditure is typical. In 2016, the Company’s capital expenditures amounted to RUB 65.6 billion (20.7% of revenue). ACRA expects that capital expenditures may grow in all telecommunications companies after the exact requirements for telecom operators are approved as part of the amendments to the Federal Law "On Counteracting Terrorism" and in the Criminal Code of the Russian Federation. However, since the exact requirements are not yet established, we did not include such expenditures in the base case scenario of our financial model. That said, the near-zero fluctuation in the FCF margin after dividends at and high capital expenditures result in a weak cash flow of the Company.
Very high level of corporate governance. In 2017, MegaFon approved its new strategy, which sets forth the following key objectives: provision of digital client-focused services and formation of an ecosystem of services. Purchase of MGL may boost the creation of such ecosystem through maximal coverage of Internet audience. Corporate decision-making and risk management processes are well regulated. Top managers possess sound work experience in the industry. The informational transparency of the Company is high.
Key assumptions
- Positive FCF margin after dividend;
- ARPU shrinking annually by 3%;
- Subscriber base to remain stable;
- No one-off, heavy expenditures required to comply with new requirements to communications providers (amendments in the Federal Law “On Counteracting Terrorism” and in the Criminal Code of the Russian Federation).
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Declining debt adjusted for operating lease to FFO before fixed charges ratio below 2.0x and advancing FFO before fixed charges to fixed charges ratio above 5.0x.
- Growing FCF margin after dividend above 5%.
A negative rating action may be prompted by:
- Negative FCF margin after dividend;
- Annual decrease of ARPU by over 3% or subscriber base by over 5%;
- Increasing debt adjusted for operating lease to FFO before fixed charges above 3.5х or declining ratio of FFO before fixed charges to fixed charges below 2.5;
- Declining FFO margin before fixed charges and taxes below 40%;
- Access to external liquidity sources worsening considerably;
- Need of substantial capital expenditures in order to comply with requirements to telecommunications providers as detailed in amendments to the Federal Law “On Counteracting Terrorism” and to the Criminal Code of the Russian Federation.
Rating components
Standalone creditworthiness assessment (SCA): aa.
Adjustments: none.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to PJSC «MegaFon» for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (September 21, 2017).
Disclosure of deviations from approved methodologies: the profitability factor was assessed with a deviation from the assessment range as specified in the methodology.
The assigned credit rating is based on the data provided by PJSC «MegaFon», information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and PJSC «MegaFon» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by PJSC «MegaFon» in its financial statements have been discovered.
ACRA provided no additional services to PJSC «MegaFon». No conflicts of interest were discovered in the course of credit rating assignment.
