(The following statement was released by the rating agency)SINGAPORE, July 28 (Fitch)
Fitch Ratings has affirmed Singapore Telecommunications Limited's (Singtel) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs), as well as its senior unsecured rating, at 'A+'. The agency has also affirmed at 'A' the Long-Term Foreign-Currency IDR and senior unsecured rating of Singtel's wholly owned subsidiary, Singtel Optus Pty Limited (Optus). The Outlook on the IDRs is Stable.
KEY RATING DRIVERS
Low Rating Headroom: Fitch expects Singtel's FFO-adjusted net leverage for the financial year ending March 2017 (FY17) to be around 2.0x (FY16: 2.1x); near the level above which we may consider negative rating action. Negative FCF is likely to persist due to the company's high capex needs and dividend commitments. We estimate group annual cash capex of SGD2.3bn-2.4bn (FY16: SGD2.1bn), driven by investment in a new data centre in Singapore, 4G expansion in Australia and new unified billing and customer care systems. Merger and Acquisition Prospects: Fitch believes Singtel will continue to pursue merger and acquisition prospects to drive inorganic growth. However, its acquisition strategy is likely to be more focused after the SGD1bn investment in Trustwave and realignment of its Digital Life (DL) business in FY16. An earlier-than-expected divestment of NetLink Trust - ahead of Infocomm Development Authority's (IDA) mandated April 2018 deadline, will also provide additional financial headroom. Tepid FFO: We forecast Singtel's FFO at SGD5.0bn-5.1bn in FY17 (FY16: SGD5.3bn), as slow growth of operations in Singapore and Australia offsets continuing EBITDA losses in DL. The potential entry of a new mobile network operator in Singapore could also increase domestic competition, although Singtel's diversified cash flows will help cushion the effects.
Approximately 33% of Singtel's FFO emanates from Singapore, 42% from Optus and 25% from associates in the form of cash dividends.Parental Support: Singtel's 'A+' ratings factor in one-notch of support above its standalone ratings to reflect Singapore's (AAA/Stable) majority state ownership (51% at end-May 2016) through Temasek Holdings (Private) Limited (Temasek). Singtel is Temasek's largest investment, accounting for about 13% of total investment value of SGD242bn at end-March 2016.Strong Regional Play: Singtel's standalone credit profile of 'A' reflects its diversified income stream through its solid market position in Singapore, number two market position in Australia through Optus and leading market positions in Indonesia, India, the Philippines and Thailand through associates. Strong Optus-Singtel Link: The strong linkage between Optus and Singtel leads to an equalisation of Optus's rating with Singtel's standalone credit profile of 'A'. Singtel owns 100% of Optus and maintains full control through the board. Fitch expects Optus's revenue to decline by mid-single-digits in FY17, but EBITDA to stay flat following the fall in Australia's mobile termination rates in January 2016.
LIQUIDITY
Adequate Liquidity: Singtel's liquidity is strengthened by its strong access to capital markets and banks, which is underpinned by its regional market reach and robust financial position. Fitch expects Singtel to partially refinance its short-term maturities of SGD686m over the next year. In addition, the company had an unrestricted cash balance of SGD462m at end-March 2016 and undrawn committed bank facilities to tap into. Singtel's undertaking to lower its equity-stake in NetLink Trust to below 25% by April 2018 also provides the group with additional liquidity.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:- flat revenue in FY17, then rising at a low-single-digit percentage in FY18 and FY19- an operating EBITDAR margin of around 31% (FY16: 30.7%) in FY17-FY19, with better data monetisation offsetting declining roaming revenues - stable dividends from associates of SGD1.2bn-1.3bn in FY17-FY19 - annual cash capex of around SGD2.3bn-2.4bn in FY17-FY19; excluding additional spectrum fees- divestment of Singtel's stake in NetLink Trust to below 25% in FY18- no major debt-funded merger and acquisitions plans- a dividend payout ratio of 73%-75% in FY17-FY19 (FY16: 73%), in line with Singtel's stated policy of 60%-75% of underlying profit.
RATING SENSITIVITIES
Rating Sensitivities - SingtelPositive: There is limited upside potential for Singtel's rating in the short- to medium-term, although developments that may, individually or collectively, lead to positive rating action include:- FFO-adjusted net leverage falling below 1.0x, with positive post-dividend distribution FCF on a sustained basis- tangible evidence of support from Temasek, including an equity injection or legal guarantee on Singtel's debt.Negative: Developments that may, individually or collectively, lead to negative rating action include:- FFO-adjusted net leverage above 2.0x on a sustained basis- FFO fixed-charge coverage below 7.0x (FY16: 8.7x) on a sustained basis- weakening of ties between Temasek and Singtel, indicating a change in implied support.Rating Sensitivities - OptusPositive: Developments that may, individually or collectively, lead to positive rating action include:- an upgrade of Singtel's standalone ratings or a strengthening of the linkage between Singtel and Optus, for example, through parental legal guarantees.Negative: Developments that may, individually or collectively, lead to negative rating action include:- a downgrade of Singtel's standalone ratings or a weakening of the linkage between Singtel and Optus.
Contact: Primary Analyst Janice Chong Director+65 6796 7241 Fitch Ratings Singapore Pte Ltd.6 Temasek Boulevard#35-05 Suntec City Tower 4Singapore 038986 Secondary Analyst Nitin SoniDirector+65 6796 7235Committee Chairperson Steve Durose Managing Director+612 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1009677Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009677Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.