Fitch: Movistar Colombia’s Margins Pressured By Sluggish Mobile Data & Non-Traditional Fixed Services Growth

Fitch Ratings expects operating margins for Colombia Telecomunicaciones S.A. E.S.P. (Coltel) to weaken in the short to medium term due to the slow pace of revenue diversification and a downward trend for average revenue per user (ARPU). Despite the ongoing challenges, Fitch believes that the company’s free cash flow (FCF) generation should turn around from 2016 and help retain its stable credit profile, in line with the current rating level.

Colombia Telecomunicaciones does business as Movistar, and is the Colombian unit of Spain’s Telefónica. In 2004 the company took over a base of customers from the old US based Bell South (now part of ATT), and in 2013 merged the fixed line operations of Colombia Telecomunicaciones with Telefonica’s Movistar subsidiary, consolidating Telefonica’s Colombian assets under the legal name of Colombia Telecomunicaciones, but operating as the Movistar brand.

During the last 12 months as of June 2015, Coltel had yet to show meaningful growth in its high ARPU (Average Revenue Per User) products, such as broadband and HD-TV, to improve its EBITDA and achieve a higher revenue diversification target. The contribution for its pay-TV service remained at just 5% of total sales, significantly lower than its 10% target. The company plans to execute an average of USD $400 million of capex a year, with about 60% of that budget to be used in deploying its fiber-to-the-cabin (FTTC) network and the remaining 40% for fiber-to-the-home (FTTH) networks, to support its non-traditional business growth and diversify away from the traditional and less profitable services.

Fitch forecasts ColTel’s EBITDAR margin will fall to 38% by the end of 2015 as revenues for its traditional fixed and voice services continue to contract amid a fiercely competitive environment. Ongoing Colombian peso devaluation is also negative as it translates into higher smartphone prices for subscribers, which would slow the penetration of its LTE user base. As a result, Fitch expects the company to miss its target for mobile data subscribers of 1 million by the end of 2015, which would be negative for its falling EBITDA trend. Coltel had 564,000 mobile data users as of May 2015.

Coltel intends to implement various cost saving initiatives, through which the company expects to achieve approximately 160 billion pesos per year during 2015 – 2019. However, Fitch does not expect these efforts to be sufficient to cope with the expected fall of the company’s EBITDAR margin.

Positively, Fitch forecasts Coltel’s FCF generation to turn positive from 2016 as its most intensive capex phase should be completed in 2015. Together with the expectation of no dividend payments during 2015 – 2019, this should allow the company sufficient internal cash flow generation to service its short-to-medium term debt maturities. As this largely mitigates the negative impact from weaker margins, Fitch expects Coltel’s leverage ratio to continue modestly improving to below 3.0x excluding the PARAPAT liability over the medium term from 2.9x as of June 2015. The company also hedges all of its foreign currency denominated debt protecting it from the recent volatile foreign exchange rates movement, providing additional credit protection.

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