Published on: 21st Nov 2014
Fitch Ratings says that SingTel’s debt rating could come under pressure as leverage is likely to deteriorate. However, credit metrics for Starhub Limited and M1 Limited will remain stable, supported by improving profitability, declining capex and manageable dividend payouts.
Fitch expects SingTel’s 2015 funds flow from operations (FFO)-adjusted net leverage to remain around 1.9x-2.0x – close to the threshold where Fitch could consider negative rating action. FFO will be flat at SGD5.4bn-5.5bn in 2015, and just sufficient to cover its capex and dividend commitments.
Leverage could deteriorate as SingTel embarks on debt-funded acquisitions to expand its Digital Life segment, which includes mobile video and digital advertising. It has budgeted SGD1.5bn for such acquisitions during 2015-2016. SingTel’s dｭigital acquisition strategy is broadly credit negative as it will weaken its credit profile in the short term. Fitch expects the Digital Life segment to continue to report EBITDA losses during 2015-16 following a loss of SGD170m in 2014.
Free cash flow (FCF) is likely to improve at both Starhub and M1 as they will generate on average a FCF margin of around 5% due to lower capex. Average capex/revenue will decline to 10%-11% (2014: 13%) and dividend payouts will remain similar to 2014 levels.
Industry revenue will grow at a low single-digit rate as an increase in the high teens in mobile data revenue will offset declining text and international service revenue. Data revenue will benefit from volume-based pricing as a greater portion of users move to tiered data bundles. The average operating EBITDA margin for the telcos will improve slightly to around 32% from 31% in 2014, benefitting from tiered data pricing and lower subscriber acquisition costs as handset subsidies decline.
All three operators have largely completed their Long-Term Evolution (LTE) network expansion, and have low maintenance capex requirements.
The Singapore industry regulator’s plan to allow a fourth operator or a mobile virtual network operator – although unlikely – could lead to a significant increase in competitive intensity. This could change the Outlook on the sector to negative. Also, SingTel’s ratings could be downgraded if its FFO-adjusted net leverage rises to over 2.0x (2014: 1.9x) or FFO fixed-charge coverage falls below 7.0x (2014: 7.7x) on a sustained basis.