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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.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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