Tower tax, if implemented, will swell Mobitel’s tax bill by Rs.3bn: Fitch

The mobile tower tax proposed in the 2018 budget will result in the state-controlled Sri Lanka Telecom PLC’s mobile arm, Mobitel (Pvt) Ltd., paying Rs.3 billion as  additional taxes per annum, Fitch Ratings said. 

“Fitch believes SLT’s 2018 operating EBITDAR margin could decline to 24 percent (2017 forecast: 29 percent) and its funds flow from operations (FFO) adjusted net leverage could deteriorate to 2.5x (2017 forecast: 1.9x) if it were to pay an additional Rs.3 billion tax for its mobile towers,” Fitch said.

The proposed monthly tax of Rs.200,000 per mobile tower was announced on 9 November 2017 in the 2018 budget. SLT’s fully owned subsidiary, Mobitel owns over 1,500 towers.

However, Fitch said the additional taxing wouldn’t affect SLT’s rating (AAA(lka)/Stable) as the telecom group has sufficient headroom to absorb the proposed tax.
Meanwhile, the rating agency said SLT’s fibre investments are likely to have low returns, despite higher capital expenditure, due to the country’s low broadband tariffs.
“We expect SLT’s 2017 capex to reach about Rs.25 billion, or 34 percent of revenue, before moderating to LKR20 billion-23 billion per year.”

Fitch expects SLT’s data revenue growth to improve following the removal of the telco levy on data services from September 2017, which will lower the effective tax rate to around 2 percent from 32 percent.

“However, we forecast SLT’s EBITDA margin to dilute by about 50bp a year over 2018-2020, as improving profitability on fixed-broadband and mobile internet usage will only partly offset margin dilution from a falling share of profitable fixed-voice and international operations.”  

The rating agency also said the overall revenue growth of SLT is likely to slow to 1.5 percent in 2017 due to the reintroduction of Value Added Tax and Nation Building Tax on telecom services, but should recover to mid-single digits in 2018-19 along with better mobile-voice revenue and the robust data growth.

Fitch also reiterated the need for industry consolidation in Sri Lanka’s teleco space, which has five operators that face still high investment requirements and smaller operators remaining unprofitable.

However, Fitch noted that SLT’s National LongTerm rating could come under pressure if it were to perform a debt-funded acquisition of a smaller operator.

“…any rating action will be based on the acquisition price, funding structure and the financial and operating profile of the combined entity.”

SLT’s debt issue up to Rs.7bn rated ‘AAA(lka) Exp’

Meanwhile, Fitch Ratings has assigned SLT’s proposed senior unsecured debenture issue of up to Rs.7 billion an expected National Long-Term Rating of ‘AAA(lka) Exp’.

The debentures will have a tenor of 10 years and carry fixed coupons. The debentures will be listed on the Colombo Stock Exchange, with the proceeds to be used to refinance its short-term debt and fund SLT’s capex plans.  

SLT’s senior unsecured debt is rated at the same level as its National Long-Term Rating, as the debentures rank equally with other senior unsecured obligations. 

Fitch said the final rating is subject to the receipt of final documents conforming to information already received.