Research Update:
Finnish Telecom Operator Elisa
Upgraded To 'BBB+' On Robust
Results And Strengthening Cash
Flows; Outlook Stable
Primary Credit Analyst:
Thierry Guermann, Stockholm (46) 8-440-5905; [email protected]
Secondary Contact:
Lukas Paul, Frankfurt +49 69 33999 132; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
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Research Update:
Finnish Telecom Operator Elisa Upgraded To
'BBB+' On Robust Results And Strengthening Cash
Flows; Outlook Stable
Overview
• We expect Elisa's EBITDA and cash flow generation to increase in the
coming years.
• At the same time, we expect that the company will maintain a robust
balance sheet and its credit metrics will strengthen.
• We are therefore raising our long-term ratings on Elisa to 'BBB+' from
'BBB' and affirming the 'A-2' short-term rating.
• The stable outlook reflects our anticipation that the adjusted
debt-to-EBITDA ratio will stay below 2x and adjusted free operating cash
flow to debt at about 25%.
Rating Action
On March 18, 2015, Standard & Poor's Ratings Services raised its long-term
corporate credit and issue ratings on Finnish telecommunications operator
Elisa Corp. to 'BBB+' from 'BBB'. The outlook is stable.
At the same time, we affirmed the 'A-2' short-term corporate credit rating.
Rationale
The upgrade reflects our anticipation that Elisa's EBITDA and free operating
cash flow (FOCF) will continue to improve. This is supported by mobile data
growth opportunities, owing to rising data consumption and higher prices as
customers move to services with faster speeds, and by continued cost-cutting
measures. We expect our adjusted EBITDA margin for Elisa to exceed 37% in
2017, compared with 35.9% in 2014.
At the same time, we think Elisa's capital expenditures (capex) will remain
modest at 12%-13% of revenues, which is relatively low compared with European
peers', while maintaining well-invested fixed-line and mobile networks, thanks
to demand-based capex allocation. Furthermore, we continue to view the Finnish
telecom market as very stable and we think Elisa will be able to maintain its
competitive position without additional investments. This will result in
continued FOCF conversion at about 16%-18% of revenues, which is rather high
compared with that of most European peers. Moreover, we forecast FOCF to debt
to remain at about 25% in the coming years.
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Research Update: Finnish Telecom Operator Elisa Upgraded To 'BBB+' On Robust Results And Strengthening
Cash Flows; Outlook Stable
We also expect that Elisa's other credit ratios will strengthen, for instance,
debt to EBITDA in the 1.8x-1.9x range in 2015-2016 in the absence of
acquisitions. However, we think that Elisa could continue to participate in
the consolidation of the fixed-line telecom market in Finland. While
debt-financed acquisitions would temporarily weaken Elisa's credit metrics, we
think management will remain committed to its unadjusted leverage target,
which translates into a Standard & Poor's-adjusted debt-to-EBITDA ratio below
2x. Furthermore, acquisitions are likely to have positive implications for
Elisa's scale and profitability, given the company's track record of
integrating acquisitions.
Elisa's business risk profile is underpinned by the company's leading and
sustainable positions in its domestic market and its state-of-the-art
fixed-line and mobile networks; Elisa's fourth-generation mobile network
covers more than 95% of the population and is likely to support mobile data
revenue growth as consumers require higher speeds. In addition, the company
will continue to implement cost reductions, and we forecast that profitability
will likely improve gradually in the coming years. These strengths are
constrained by ongoing regulatory pressure, fierce competition with low
prices, already high penetration of broadband and mobile services, and a
structural decline in traditional landline services.
Elisa's financial risk profile is underpinned by Elisa's financial policy,
which targets net debt to EBITDA of between 1.5x and 2.0x, and our
anticipation of solid and increasing FOCF.
Given the strengthening of Elisa's balance sheet, we now view Elisa's overall
credit characteristics to be in line with those of peers at the same rating
level.
In our base case for Elisa, we assume:
• Flat to modest revenue growth in 2015 and 2016. Growth in mobile data and
Internet Protocol TV, and new products such as video conferencing, offset
by additional mobile termination rate cuts;
• The adjusted EBITDA margin will increase gradually to about 37% in
2016-2017, partly from further synergies from operations acquired in 2013
and continuous efficiency measures;
• Capex totaling about 13% of revenues (about €200 million); and
• Dividends at the higher end of Elisa's public guidance range of 80%-100%
of the previous year's net income.
Based on these assumptions, we arrive at the following credit measures for the
next two years:
• A gradual decline in adjusted debt to EBITDA to 1.8x-1.9x in 2015 and
1.8x in 2016;
• Funds from operations to debt of 45% in 2015-2016; and
• FOCF of €240 million in 2015 after capex, translating into FOCF to debt
of about 25% in 2015-2016.
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Research Update: Finnish Telecom Operator Elisa Upgraded To 'BBB+' On Robust Results And Strengthening
Cash Flows; Outlook Stable
Liquidity
The short-term rating is 'A-2'. We assess Elisa's liquidity as "adequate,"
according to our criteria, and we expect sources of liquidity to cover uses by
at least 1.2x over the next 12 months. This is although a significant portion
of Elisa's funding consists of commercial paper with terms shorter than nine
months.
We estimate Elisa's key liquidity sources at about €785 million in 2015,
comprising:
• Consolidated cash and equivalents of €41 million;
• Cash flow from operations of about €445 million;
• An undrawn revolving credit facility of €170 million, maturing in June
2018; and
• An undrawn revolving credit facility of €130 million, maturing in June
2019.
Against these sources, we anticipate liquidity uses of about €650 million in
2015:
• Debt amortization of €228 million, including €210 million of commercial
paper;
• Annual capex of about €200 million; and
• Dividends of €223 million.
We also believe that Elisa has very good access to capital markets and solid
relationships with its core bankers. The company is listed, and has about
eight million treasury shares, providing a potential additional source of
liquidity of €185 million. One revolving facility is provided by five banks
and the other by four banks. Both have maintenance covenants, under which
Elisa has adequate headroom, in our view.
Outlook
The stable outlook reflects our anticipation that the adjusted debt-to-EBITDA
and FOCF-to-debt ratios will remain sustainably below 2x and at about 25%
respectively.
Downside scenario
We could lower the ratings if Elisa's EBITDA or FOCF declined, for example,
because competitive pressure caused a pronounced revenue decline or weaker
margins; or if the adjusted debt-to-EBITDA ratio remained above 2x or FOCF to
debt declined below 20% for a prolonged period, for instance, due to
debt-financed acquisitions.
Upside scenario
Rating upside is remote, given Elisa's limited scale and diversification, and
its financial policy, which targets net debt to EBITDA of between 1.5x and 2x.
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Research Update: Finnish Telecom Operator Elisa Upgraded To 'BBB+' On Robust Results And Strengthening
Cash Flows; Outlook Stable
Ratings Score Snapshot
Corporate Credit Rating: BBB+/Stable/A-2
Business risk: Satisfactory
• Country risk: Low
• Industry risk: Intermediate
• Competitive position: Satisfactory
Financial risk: Modest
• Cash flow/Leverage: Modest
Anchor: bbb+
Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Financial policy: Neutral (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)
Related Criteria And Research
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Dec. 16, 2014
• Key Credit Factors For The Telecommunications And Cable Industry, June
22, 2014
• Corporate Methodology, Nov. 19, 2013
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Group Rating Methodology, Nov. 19, 2013
Ratings List
Upgraded; Ratings Affirmed
Elisa Corp.
Corporate Credit Rating
Senior Unsecured
To
From
BBB+/Stable/A-2
BBB+
BBB/Positive/A-2
BBB
Additional Contact:
Industrial Ratings Europe; [email protected]
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Research Update: Finnish Telecom Operator Elisa Upgraded To 'BBB+' On Robust Results And Strengthening
Cash Flows; Outlook Stable
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