Moody’s Investors Service has affirmed the Ba2 foreign currency and Ba2 domestic currency corporate family ratings of Turkcell Iletisim Hizmetleri A.S., but changed the outlook to ‘positive’ from ‘stable’.
“The change in outlook to positive reflects i) Turkcell’s robust operational and financial performance mainly underpinned by its solid subscriber growth (up 13%) and increasing ARPU levels during the 3rd quarter of 2007, which together resulted in a 29% revenue growth in US dollar terms on a comparable interim 9 month basis; ii) improved profitability despite intensified competition in the market; iii) its conservatively leveraged capital structure supported by its strong and sustainable cash flow generation capacity in the absence of any major investments in 2007 in international expansion or 3G); and iv) the positive momentum in its Ukraine investment,” said Ayse Kayral, lead analyst for Turkcell at Moody’s.
More cautiously, Moody’s Ba2 rating on Turkcell continues to factor in i) the expectation of a more competitive market in 2008 with the implementation of Mobile Number Portability and given that penetration levels are rapidly approaching saturation; ii) its continuing appetite for international expansion and the uncertainty surrounding the scale and timing of potential investment opportunities; iii) the accelerated capital expenditure programme in 2008 including broadband and 3G investments should Turkcell acquire a 3G licence; iv) residual uncertainties in the ownership structure which could impose limitations on setting and carrying out sustainable business strategies and financial policies, although day-to-day operations do not appear to have been impacted to date; and v) a shareholder remuneration policy that may evolve towards a higher dividend payout ratio.
The Ba2 rating continues to incorporate substantial flexibility for strategic investments noting that the company has a conservatively leveraged capital structure with USD 740 mln in on-balance sheet debt and USD 2.5 bln cash and cash equivalents as of the third quarter of 2007.
The positive outlook on the rating assumes that while potentially accelerated capital investment requirements together with other potential cash outflows such as tax and dividend payments may result in negative free cash flow over the short term, the company would be expected to return to a position of reporting positive underlying free cash flow fairly quickly. To the extent that fx-denominated indebtedness were to increase, Turkcell’s future exposure to foreign currency fluctuations would also correspondingly rise, adding a risk not currently considered to be a major factor for the company.
Conversely, an increase in leverage beyond Moody’s current expectations entailing a deterioration of the credit profile, a significant weakening of the market position due to competitive pressures, and aggressive financial policies would likely exert negative pressure on the ratings.
Turkcell is the leading GSM operator with a 57% market share with 34.8 mln subscribers. The company also operates in the Ukraine through its indirect subsidiary Astelit; in Azerbaijan, Kazakhstan, Georgia and Moldova through its associate Fintur; and in occupied northern Cyprus through its wholly-owned subsidiary Kibris Telekom. In 9M2007, the company reported revenues of USD 4.5 bln and EBITDA of USD 1.9 bln under IFRS.
