The transition to 5G in many Asia-Pacific markets will include consolidation, says Fitch Ratings. “The 5G technology will favour operators with scale and strong balance sheets, which may contribute to diverging credit quality over time across the peer group,” says Fitch.
“It will be difficult for smaller telcos to absorb 5G investment without an immediate return on investment,” Fitch adds.
To be sure, the connectivity business has always been an undertaking that benefits from scale and density. That was true in the monopoly era and remains true in the competitive era. So with or without 5G, the trend towards consolidation would continue.
Free cash flow will be weak for most firms through 2022 because of high capital investment profiles and slow operating cash flow growth, Fitch says. “We expect most of the companies in the peer group to have negative free cash flow (FCF) in 2021-2022 due to high capex and slow growth in operating cash flow.”
Capital preservation will be necessary for up to half of firms analyzed by Fitch, with staggered 5G investment, dividend reduction and asset sales.
PT Telekomunikasi Indonesia Tbk (Telkom, BBB/Stable) “is the only company with high rating headroom, while Singapore Telecommunications Limited (Singtel, A/Stable) has the least,” Fitch says.
Fitch expects tight competition and significance of scale to raise the prospects of merger and acquisition activity in India, Indonesia, Malaysia and Singapore.
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