Singtel and Optus’ outlook downgraded to negative: Moody’s

An intense price competition in Singapore and Australia is pointing to lower average revenue per user and profitability in both markets while the subscription to India's Bharti Airtel rights issue would raise its risks.

Singapore Telecommunications Limited (Singtel)’s ratings outlook was revised from ‘stable’ to ‘negative’ by ratings firm Moody’s Investors Service on Tuesday as a weakening operating and financial profile, and increased competition in Australia and Singapore will prove to be a challenge for the telco to have a 'meaningful improvement' in its earnings over the next 1 year to 1.5 years.

Moody's vice president and senior analyst Nidhi Dhruv said in a report that the ratings agency does not expect a meaningful improvement in Singtel's underlying earnings before interest, tax, depreciation and amortization (EBITDA) over the next 12-18 months, ‘as intense price competition in Singapore and Australia is leading to lower average revenue per user (ARPU) and profitability in both markets.’

In addition, the partial or full subscription to Singtel’s portion in its associate Bharti Airtel’s INR250 billion (US$3.5 billion) rights issue would ‘further weaken its metrics and keep net leverage above our tolerance for the rating, absent any capital restructuring initiative’, Mr Dhruv added.

The exposure in the additional equity injection to Bharti would increase Singtel’s gross leverage to around 2.3 to 2.5 times, net leverage around 2.2 to 2.4 times, and cash balances of around S$400 to S$450 million, which is not within the ratings agency’s expectations for the telco’s current A1 rating. Singtel has a 39.5% stake in Bharti.

Downward pressures expected on Singtel

Moody’s said the downward pressures could also result if the firm takes on additional material capital returns in the near term, or if there is evidence of prospective weakness in the operating results of the company's core operations or in the cash dividends it receives from its overseas associates.

Singtel's rating may also be hurt by material changes in the ratings of its supporter, Temasek, or if Temasek reduces its shareholding in Singtel to below 50%. Singtel is 52%-owned by Temasek.

The telco is expected to look for alternative funding options, including the sale of non-core assets, listing some of its new businesses, and potentially also raising fresh equity to strengthen its capital structure and credit profile.

Singtel’s outlook could be returned to stable ‘if the company’s overall profitability improves and borrowings are reduced’, with EBITDA falling below 2.0x on a constant basis, and the adjusted EBITDA remains within the range of 30% to 35%.

Singtel’s Optus outlook downgraded to ‘negative’

In a subsequent report on Wednesday, Moody’s also downgraded Singtel’s wholly-owned subsidiaries Optus and Optus Finance from 'stable' to 'negative', due to the change in outlook for Singtel. Optus is the second largest integrated telco operator in Australia.

The ratings agency said the outlook for Optus reflects the view that the weakening financial profile in Singtel may affect its ability to support its subsidiary. The agency added that it may downgrade the ratings of Optus and Optus Finance if the credit rating of Singtel is lowered.

Singtel’s shares were unchanged by 4.45pm Singapore time on Wednesday, at S$2.99.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Updated
Change

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
China 300
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.