Could Singtel be forced to end its fixed dividend policy?

SINGAPORE (Oct 10): Singapore Telecommunications (Singtel) may be forced to abandon its fixed dividend policy as outlook for its regional associates stays challenging, says DBS Group Research.

In March, Moody’s Investors Service revised Singtel’s credit ratings outlook from “stable” to “negative” citing continued pressure on the telco’s EBITDA and cash flows.

The credit ratings agency said it would consider downgrading Singtel’s credit rating, should the company’s Net Debt-to-Adjusted EBITDA (core EBITDA plus cash dividends from associates) remain elevated at over 2x or if Singtel’s core EBITDA margins continue to remain below 30%.

“We expect Singtel to likely report core-EBITDA margins below 30% over the next two years,” says DBS analyst Sachin Mittal in a Thursday research report after factoring in weakening performance of Optus, continued depreciation of the AUD against SGD, and weak fundamentals on the Singapore mobile front.

Should Singtel continue to maintain its dividends at current levels, its Net Debt-to-Adjusted EBITDA is expected to remain above 2x, says Mittal.

“Hence, we project Singtel to divert from its fixed dividend policy and peg dividend payouts to underlying earnings to relieve some burden off its balance sheet. Based on our estimates, Singtel may trim its dividend per share to 13-15 cents post FY20F from 17.5 cents currently,” says Mittal.

In Australia, Optus’ mobile growth in Australia is likely to come below DBS’s expectations. While recent increase in mobile pricing is expected to be positive for profitability over the medium term, new price plans will take time to be factored in, says Mittal. Meanwhile, weak economic outlook will continue to weigh on the Aussie dollar and on Optus enterprise segment.

In India, Bharti’s turnaround is likely to be delayed without tariff revisions and given rival Jio’s continued pressure on Bharti’s fixed segment while Vodafone-Idea is facing challenges in its network integration process, including logistical issues and the removal of duplicate sites.

Mittal says Vodafone-Idea lost around 14 million subscribers in the April-June quarter alone, with many customers citing poor service quality due the ongoing integration between the networks of two merging telcos.

As for Indonesia, Telkomsel is struggling to defend its market share outside Java. It is estimated that the telco has lost some 2.7% revenue market share over the past three quarters, says Mittal.

“In our view, Telkomsel’s market share losses could continue into 2020 with XL Axiata’s (EXCL) aggressive pricing plans and Indosat’s (ISAT) network expansions,” says the analyst.

Elsewhere in the Philippines, competition in the telco sector is also expected to intensify as the government has approved the addition of a fourth major commercial mobile operator shortly after its third. The government could also allow a fifth player into the market, putting an end to the duopoly between Globe and Smart.

Of all the associates, it seems AIS of Thailand is the only one likely to show steady growth going forward, says Mittal.

“We trim our target price to $3.12 from $3.25 before, as we reduce the valuation of the core-business by roughly 10% due to revised earnings and lower multiples,” says Mittal using 5% lower EV/EBITDA multiple of 6.0x versus 6.3x.

DBS has a “hold” on Singtel. Year to date, the counter is up 8.7% at $3.13.