Fitch expects reduced visibility on Singtel's free cash flow

FITCH Ratings on Wednesday said Singtel's weaker-than-expected growth prospects and potential for higher capital expenditure for the 5G standalone network in Singapore are likely to reduce visibility on the group's free cash flow.

This comes after the agency had in February downgraded Singtel's long-term foreign- and local-currency issuer default ratings (IDR) and foreign-currency senior unsecured rating to A from A+.

Fitch expects that the telco's leverage - defined as FFO (funds from operations) adjusted net leverage - is likely to rise to around 2.5 times in the financial year ended March 2021 (FY21) and FY22, within the agency's downgrade trigger of 2.7 times. Its projections exclude any sales of non-core assets, given the uncertainties associated with the timing and transaction value. 

In a report on Wednesday, Fitch forecasted "low single digits" revenue growth for Singtel in FY21 and FY22, at constant currency, in light of "intense" competition in Singapore and Australia and cautious business sentiment affecting corporate spending. 

That being said, the agency believes that 5G investments will ultimately strengthen competitiveness, noting that Singtel is "well-positioned" to win one of the two 5G standalone network licences up for grabs in Singapore. Results are expected to be announced by the Infocomm Media Development Authority by mid-2020. 

But in the near term, the agency argued that the current business case for 5G remains "insufficient" to justify the need for a standalone network, and that the ecosystem "may take a few more years to mature".

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"Potential for higher capex for the 5G network and the lack of compelling use cases are likely to delay returns on 5G investment," said Fitch, adding that the network deployment will be costly, although staggered investments may ease the cost outlay. 

The agency estimates Singtel's capex/revenue ratio to be at 14 to 17 per cent over the next three years, compared with 11 per cent in FY19. This projection includes S$376 million in spectrum fees for the 700Mhz spectrum when it becomes available to Singapore telcos.

An annual capex of S$2.5 to S$2.6 billion, excluding spectrum costs, is expected over the next three years.

Singtel's capital-raising options include its minority stakes in Singapore Post (22 per cent) and Netlink Trust (below 25 per cent), and longer-term plans to monetise its digital assets, said Fitch. However, it is worth noting that these minority stakes have been paying "meaningful" dividends of around S$65 million annually in FY18 and FY19. 

Fitch expects regional associates' cash dividends to remain a significant source of cash flow for the group. Its projections assume total associate dividends of S$1.4 to S$1.6 billion in the next three years, contributing almost a third of Singtel's adjusted earnings before interest, tax, depreciation and amortisation (Ebitda), including associate dividends. 

Singtel's dividend contributions from Indonesian mobile operator, PT Telekomunikasi Selular, are expected to remain significant. The 35 per cent-owned associate has "strong" market dominance in Indonesia and financial position despite its slowing revenue in 2019, said Fitch.

It added: "Rational competition and gradual data monetisation in Indonesia are likely to drive mid-single-digit revenue growth for the domestic telecoms sector."

Meanwhile, gradual data monetisation in the Philippines and stabilising competition in Thailand should support yearly dividends from Globe Telecom and Advanced Info Service (AIS) respectively. In addition, the spread of 5G spectrum payments in Thailand over a 10-year period should ease immediate pressure on AIS' cash flow, said Fitch.

Dividend contributions from AIS and Thailand's Intouch Holdings - which has a 40.5 per cent equity interest in AIS - accounted for 5 to 6 per cent of Singtel's adjusted Ebitda. 

Singtel shares closed at S$2.47 on Wednesday, down S$0.02 or 0.8 per cent.