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Singtel may cut dividend to maintain credit rating: DBS Research

It says pegging dividends to underlying earnings instead of fixed quantum will relieve Singtel's balance sheet burden

Singtel may cut its dividend payout from the current "unsustainable" rate to S$0.13-$0.15 per share for its next fiscal year starting April 1, 2020 (FY2021) in order to maintain its credit rating, DBS Equity Research said in a report on Thursday.


SINGTEL may cut its dividend payout from the current "unsustainable" rate to S$0.13-$0.15 per share for its next fiscal year starting April 1, 2020 (FY2021) in order to maintain its credit rating, DBS Equity Research said in a report on Thursday.

The telco has either maintained or raised its dividend every year for the past two decades. For its last financial year ended March 31, Singtel paid a total dividend of S$0.175 per share and said that barring unforeseen circumstances, it expects to maintain this rate for its current fiscal year (FY2020).

In its report, DBS said it expects Singtel to report core Ebitda (earnings before interest, tax, depreciation and amortisation) margins of below 30 per cent over the next two years due to pricing pressures in Australia and Singapore's mobile markets, and growing contribution of low-margin ICT (information and communications technology) service businesses to the telco's enterprise segment.

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Singtel's net debt-to-adjusted Ebitda would remain at over two times if it maintained its current "unsustainable" dividends levels, it added.

DBS said Singtel might consider recalibrating its dividend policy from a fixed payout to one that is pegged to underlying earnings to relieve the burden on its balance sheet.

When contacted about the research report, a Singtel spokesman said there was no change from its previous guidance.

The telco's dividend policy states that "Singtel is committed to delivering dividends that increase over time with growth in underlying earnings, while maintaining an optimal capital structure and investment grade credit ratings".

Earlier this year, Standard & Poor, Moody's Investors Service and Fitch Ratings revised Singtel's outlook to negative.

Moody's said in March it may consider downgrading the telco's credit rating if its net debt-to-adjusted Ebitda remains elevated at over two times or if Singtel's core Ebitda margins continue to remain below 30 per cent.

IHS Markit's senior research analyst Wong Chong Jun, however, said Singtel is unlikely to cut its dividend for FY2021.

"Although keeping the dividends flat might result in a payout ratio that exceeds its current target payout range, we noted that Singtel has a history of increasing its target payout range. Since FY2007, the company has amended its dividend policy thrice," he said.

Singtel's ability to generate strong free cash flow has allowed the company to support its dividends, Mr Wong added.

"At the current payout level of S$0.175 per share, dividends will aggregate to S$2.86 billion and this is still below the guided free cash flow for FY2020 of S$3.6 billion.

"In other words, the company has a wiggle room of S$740 million, and free cash flow will need to decline by around 20 per cent in FY2021, before it feels the pressure to cut dividends."

In its report, DBS also trimmed its forecast for Singtel's FY2020 and FY2021 earnings by 5 per cent and 3 per cent respectively, taking them to 10 per cent and 8 per cent below analysts' consensus.

DBS said the profit contributions from regional associate companies have been critical in driving Singtel's share price but there is a lack of clarity on Indian associate Bharti Airtel's path to profitability and meagre growth from associate Telkomsel, which is losing revenue share in Indonesia.

DBS does expect Singtel's earnings growth to resume in FY2021, but with the negatives mostly priced in.

It expects associate contributions and Singtel's ability to monetise its digital businesses to be key drivers to share price performance.

DBS maintained its "hold" call on Singtel with a target price of S$3.12, down from S$3.25 previously, based on a 10 per cent reduction in valuation of Singtel's core operations in Singapore and Australia.

In a bullish scenario in which core business strengthens and associate valuations increase, DBS places Singtel's fair value at S$3.65.

This drops to S$2.55 in a bear-case scenario.

According to a study on dividends by financial data provider IHS Markit, some S$9.3 billion worth of dividend payouts from eight Temasek-linked companies including Singtel make up almost half the S$19.6 billion total projected total payout of the 30 constituents of the FTSE Straits Times Index (STI) in 2018.

Contributions from government investment company Temasek are included in the Net Investment Return Contribution (NIRC) framework, a key component of government budgeting.

Speaking in Parliament in February last year, Finance Minister Heng Swee Keat said the NIRC is the largest contributor to Singapore's revenues, larger than any single tax, including the goods and services tax, and corporate and personal income taxes.

Singtel accounted for the biggest single parcel of dividends within the STI until 2018, when it was surpassed by DBS which declared a special dividend for that year.

Singtel shares closed up S$0.01 or 0.32 per cent at S$3.15 on Thursday.