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Fitch – Impact of 5G upcycle to put pressure on operators’ FCF in emerging markets including SL

October, 9, 2019

The impact of 5G upcycle, spectrum payments to put more pressure on operators’ FCF (free cash flow) in emerging markets, like Sri Lanka, India, Philippines, Indonesia, where the capex intensity is already above 30%, although widespread 5G rollout is not likely in these countries in the shorter term, says Fitch Ratings.

According to Fitch Ratings 5G capex risk for most telcos is likely to be contained over the next 18 months. However, the pressure to acquire wider spectrum bands to support future 5G rollout will reduce rating headroom.

Fitch expects leverage metrics to be stretched over the next three years, as higher operating cash flows typically lag investment outlays.

Early 5G deployments are therefore likely to favour operators with significant scale and strong balance sheets, although a shared model may offer smaller companies cost advantages to spur competition.

Early monetisation of 5G use may be limited, and the upcoming 5G spectrum auctions will keep telcos' free cash flow (FCF) subdued.

The full statement is reproduced below:

Fitch Ratings: Global Telcos' 5G Capex Risk Contained; Leverage Stretched

Fitch Ratings-London/Chicago/NY/Singapore-07 October 2019: 5G capex risk for most telcos is likely to be contained over the next 18 months, says Fitch Ratings. However, the pressure to acquire wider spectrum bands to support future 5G rollout will reduce rating headroom.

Fitch expects leverage metrics to be stretched over the next three years, as higher operating cash flows typically lag investment outlays. Early 5G deployments are therefore likely to favour operators with significant scale and strong balance sheets, although a shared model may offer smaller companies cost advantages to spur competition. Early monetisation of 5G use may be limited, and the upcoming 5G spectrum auctions will keep telcos' free cash flow (FCF) subdued.

South Korean telcos are likely to be among the global leaders' 5G investments, raising their capex/revenue (excluding spectrum) to 20%-22% through 2020 (2018: 16%), which is broadly in line with the average ratio for most regions. Fitch expects capex intensity in Europe to average around 20% in 2019-2020, although some telcos had previously demonstrated the ability to manage their leverage profiles through dividend cuts and asset disposals. In the US, the two largest wireless carriers are likely to maintain their capex intensity at around 13%, given the incremental capex for software and hardware upgrades while leveraging existing 4G networks for nationwide 5G rollout.

The impact of a 5G upcycle and spectrum payments will, however, put more pressure on operators' FCF in emerging markets, such as India, the Philippines, Indonesia and Sri Lanka where the capex intensity is already above 30%, although widespread 5G rollout is not likely in these countries in the shorter term. Meanwhile, we anticipate a delay in 5G capex spending in Latin America, as operators are still transitioning to 4G.

5G implementation will remain patchy until 2021, when a robust handset ecosystem is in place. We expect most telecoms markets to depend on existing 4G and 4G Plus technologies to provide sufficient speeds to cater for data demand in the next few years. Successful execution of 5G will take years to implement, as the ability of operators to meaningfully monetise these services and drive consumers' willingness to pay remain uncertain.

Fitch presents our views on global 5G deployments; the importance of access to sufficient and affordable spectrum; the technology's potential to disrupt competition; and the possibilities for collaborative approaches to accelerate 5G rollout.