Moody's on SingTel's profit jump in Q2: We saw it coming

The ratings agency said the telecommunications company’s S$4.44b revenue was in line with its expectations and has no immediate impact on the company's Aa2 rating.

In a statement, Moody’s credited SingTel’s healthy year-over-year revenue growth to strong additions in post-paid smart phone subscribers in both Singaporeand Australia, as well as solid performance in the company's IT &
Engineering business.

Group revenue grew by 8.1% year-over-year and 3.4% quarter-over-quarterfor the 3 months ending September 2010, although this growth was muted in terms of EBITDA by increasing operating costs.

"Content, programming costs and smart phone subsidies continue to tempermargins -- and we believe this will persist until SingTel can monetize on these subscriber acquisition costs," Laura Acres, a Moody’s Vice President and Senior Credit Officer, said.

Dividends from associates were slightly lower year-over-year, primarilythe result of a lower payout from Telkomsel, as the Indonesian market remains competitive. Overall, the company's leverage, measured at 1.36xadjusted debt / EBITDA and 1.05x adjusted net debt / EBITDA (based on adding cash dividends from associates back to EBITDA), has remainedstable, and consistent with an investment grade credit profile.

High shareholder remuneration continues to act as a drag on the company'scash flow metrics, and it is our expectation that this will continue, particularly as SingTel has increased its dividend payout policy to 55%- 70%.

" SingTel's financial metrics and liquidity profile remain strong andcontinue to leave its standalone rating well positioned at the single A range," Acres, lead analyst for SingTel, said. "The final Aa2rating factors in the expected support from its major shareholder, Temasek Holdings (Pte) Limited ("Temasek" -- rated Aaa/stable),” she added.

SingTel's 30% owned associate Warid Telecom (Private) Limited ("Warid")is currently in discussions with its lenders in relation to a proposed restructuring of its loan facilities. Furthermore Huawei InternationalPte. Limited filed a winding-up petition as it seeks payment on approximately US$140 million in payables. As of September 30, 2010, the company had approximately US$754 million in borrowings - US$90 million of which were guaranteed by SingTel (US$512 million is guaranteed by Warid'smajority shareholder).

Warid currently represents a very small portion of SingTel's overalloperations, and has yet to make any contribution to SingTel's EBITDA with cash dividends. While not obligated, SingTel has supported Warid inthe past with equity injections, although Moody's is unable to ascertain the likelihood of forthcoming support as a result of restructuring proceedings apart from the company's $90 million guarantee.

"Moody's is cognizant of potential credit risks to the greater SingTelgroup which at times may not always be apparent on SingTel's balance sheet. To account for such risks, Moody's fully adjusts for anyguarantees offered by the group to associates, to reflect for the potential contingent liabilities SingTel may incur as a result ofdistress at these entities. However, we gain comfort in the fact that most of SingTel's associates maintain strong financial profiles, leadingmarket positions, and enjoy strong access to capital," says Acres.

Moody's last rating action with regard to SingTel took place on 30th July,2010, when Aa2 ratings were assigned to the S$10 billion Euro MTN programme.