No ‘meaningful' earnings growth for Singtel in 12-18 months: Moody's

Its leverage has risen 2.03x and has hurt its operating and financial profile.

Singtel’s earnings are not expected to have a meaningful improvement over the next 12-18 months no thanks to intense price competition in Singapore and Australia that has hurt its average revenue per user and profitability in its two key markets, Moody’s Investors Service said.

According to a note, Singtel's leverage — as measured by net debt/EBITDA — has progressively increased to 2.03x for the 12 months ended December 2018, reflecting a weakening operating and financial profile amid intensifying competition in Singtel's core markets of Singapore and Australia. These markets contributed 37.0% and 43.3%, respectively, of the group's post-tax profit (based on the sum of its core EBITDA from Singapore, Australia, other overseas subsidiaries, including Amobee and Trustwave, and the share of its associates' post-tax profit) during the same period.

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Moody's expects Singtel will partially or fully subscribe to its portion of the $4.79b (INR250b) rights issue announced by Bharti Airtel Ltd. (Ba1 negative), Singtel's 39.5% associate in India.
"If Singtel predominantly debt-funds this additional equity injection into Bharti, it would further weaken its metrics and keep net leverage above our tolerance for the rating, absent any capital restructuring initiatives," said Nidhi Dhruv, a Moody's vice president and senior analyst.

Post investments in Bharti, Moody's expects Singtel's gross leverage (under the dividend method) to increase to around 2.3x-2.5x. With cash balances of around $400m-450m, net leverage will be around 2.2x-2.4x, which is not within Moody's expectations for Singtel's current A1 rating.

"We expect Singtel will explore alternative funding options — including 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. However, the timing and execution of these initiatives will be driven by market dynamics, and will be subject to regulatory and shareholder approvals," added Dhruv.

The negative outlook reflects Singtel's weak credit metrics for Moody’s A1 rating level, with limited potential for near-term improvement in the company's underlying profitability. The negative outlook also reflects the uncertainties with regard to timing and execution of potential capital restructuring plans.

“Downward pressure could also result if the company undertakes further material capital returns in the near term, especially in conjunction with a cash/debt-funded acquisition, 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,” Dhruv said.

Singtel's rating may also be hurt by material changes in the ratings of its support provider, Temasek, or if Temasek reduces its shareholding in Singtel to below 50%. “At the same time, industry developments that materially undermine Singtel's relationship with the government could also strain the ratings,” the analyst added.

Moody's could only change Singtel’s outlook to stable if the telco’s overall profitability improves coupled with an absolute reduction in borrowings, such that its adjusted net debt/EBITDA falls below 2.0x on a consistent basis, and adjusted EBITDA margin remains within the 30%-35% range.