Fitch Affirms Singtel at 'A' and Optus at 'A-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Singapore/Seoul-09 February 2021: Fitch Ratings has affirmed Singapore Telecommunications Limited's (Singtel) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and foreign-currency senior unsecured rating at 'A'. The agency has also affirmed the Long-Term Foreign-Currency IDR and senior unsecured rating of Singtel's wholly owned subsidiary, Singtel Optus Pty Limited (Optus), at 'A-'. The Outlook on the IDRs is Stable. The Stable Outlook reflects our expectations that Singtel's FFO net leverage over the next two years will be commensurate with its rating. A disciplined financial policy remains a key rating driver due to the low rating headroom. Singtel had demonstrably cut dividends in the past year to manage its leverage amid weak operating performance and high capex. Potential monetisation of non-core assets may also provide additional financial flexibility to fund 5G capex, although this has not been factored into our projections due to the uncertainty over the timing and transaction value. Key Rating Drivers Low Rating Headroom: Singtel's deleveraging pace amid a challenging environment will depend on capital preservation, including shareholder returns. It adopted a scrip dividend scheme from November 2020, giving shareholders the option of receiving new shares in lieu of cash. It cut financial year ended March 2020 (FY20) final dividends by 49% in May 2020, and FY21 interim dividends declared by 25% in November. The scheme's interim dividend participation was 54%. Cumulative dividends of SGD1.3 billion in FY21 to date were lower than the SGD2.9 billion annual dividends in FY19-FY20. Slow Recovery: Tough market conditions and the effects of the coronavirus pandemic's disruptions will weigh on Singtel's operating cash flows. We expect group EBITDA to drop by mid-to-high teens in FY21. Near-term EBITDA recovery is likely to be slow, supported by the revival of enterprise revenue and the group's cost-saving initiatives. Weak roaming revenue due to travel restrictions, tight competition and structural challenges in the Australian fixed-line business may delay a full recovery in the next 12-18 months. High Capex, Spectrum: We expect a capex/revenue ratio of 17%-20% (FY20: 14%) in the next three years, including SGD376 million in spectrum fees for the 700MHz spectrum when it becomes available to Singapore telcos. Annual capex is likely to peak at SGD2.8 billion-3.1 billion in FY22-FY23 when the 3.5GHz spectrum is freed up for commercial use in Singapore in 2021. Singtel only provides guidance for group capex, excluding spectrum payments, of SGD2.2 billion in FY21 (FY20: SGD2 billion), comprising AUD1.5 billion for Optus and SGD700 million for the rest of the group. 5G Priorities: 5G spectrum and capex investments are strategic long-term drivers for incumbent telcos. Low visibility on returns and Australia's upcoming spectrum auctions of 26GHz in April 2021 and low-band in 2H21 will keep free cash flow (FCF) constrained. However, bidding limits for the high band should cap spectrum spending. Optus has rolled out 5G fixed-wireless access to 920 sites nationally, covering more than 650,000 homes. The service complements the existing National Broadband Network infrastructure to reduce Optus' wholesale costs and support overall margins. Digital Bank Venture: The full digital banking (DFB) licence recently awarded to Singtel and ride-hailing company, Grab Holdings, through a 40:60 joint venture is unlikely to contribute meaningfully to Singtel's cash flows over the next three years. The consortium aims to formally launch the digital bank in early 2022. The Monetary Authority of Singapore expects DFBs to become fully functional over five years and to meet a minimum capital commitment of SGD1.5 billion, provided other regulatory conditions are met. Singtel's share of its 40% equity stake would be SGD600 million. Financial Flexibility: Non-core asset sales, including a tower portfolio in Australia and its minority stakes in Singapore Post (22%) and NetLink Trust (below 25%), and longer-term plans to monetise its digital assets and data centres, could provide meaningful debt reduction. We estimate the monetisation of these minority stakes may improve net leverage by around 0.2x at current share prices. Robust Regional Play: Singtel's 'a-' Standalone Credit Profile (SCP) reflects a diversified income stream from solid market leadership in Singapore; its ranking as the second-largest telco in Australia by sales through Optus, and well-established platforms in fixed and mobile markets; and leading positions in Indonesia, India, the Philippines and Thailand through associates. Its overseas operations, including dividends from associates, account for two-thirds of group adjusted EBITDA. Singtel has a substantial investment in Bharti Airtel Limited (BBB-/Negative), but the Indian telco provides little dividend contribution due to large capex requirements and intense domestic competition. Single-Notch Sovereign Uplift: Singtel's ratings include a single-notch uplift from its SCP due to links with the sovereign (AAA/Stable) through Temasek Holdings (Private) Limited's majority 52% ownership. We deem Singtel's status, ownership and control linkage with the state as 'Moderate', but we assess the government's record of support at 'Strong', reflecting its financial profile and our view that support would be available if needed. The financial implication of a default is 'Moderate'. The socio-political implications of a default are 'Weak' amid the competitive telecoms sector with multiple operators to provide substitutes, limiting the impact on services from a default. Strong Optus-Singtel Link: Optus's ratings are equalised with Singtel's SCP, based on their strong linkages, in line with Fitch's Parent and Subsidiary Linkage Rating Criteria and our belief exceptional support from the Singapore government will not be available to Optus. Singtel owns 100% of Optus, and has full control through the board. We revised Optus's SCP to 'bbb-' from 'bbb+' previously, reflecting its weaker organic deleveraging capacity due to competitive pressure, pandemic effects on mobile revenue and structural challenges in the Australian fixed-line business. Derivation Summary Entities with an SCP that is more than four notches away from the sovereign's rating and a government-related entity (GRE) score of 12.5, such as Singtel, are rated on a bottom-up basis one notch above the SCP under Fitch's GRE criteria. Our GRE assessment for Singtel is lower than that for telecom peers Telekom Malaysia Berhad (TM; BBB+/Stable), PT Telekomunikasi Indonesia Tbk (Telkom, BBB/Stable), Ooredoo Q.P.S.C. (A-/Stable) and Emirates Telecommunications Group Company PJSC (Etisalat) (A+/Stable), which all have a GRE support score of 25 of the maximum 60. These telecom peers have strong ties with their ultimate parents and moderate-to-strong incentives for the states to provide support, given the high degree of government strategic oversight through board representation and policies. Their respective states also own special shares that grant veto rights over key decisions, ensuring their alignment with government policies. Singtel is rated in line with other large diversified incumbent telcos with strong domestic market positions, such as AT&T Inc (NYSE:T). (A-/Stable) and Verizon Communications Inc (NYSE:VZ). (A-/Stable), which benefit from much larger scale and mid-single-digit FCF margins. South Korea's KT Corporation (A/Stable) is rated a notch higher than Singtel's SCP due to its lower net leverage of less than 1.5x, offsetting a lack of geographical diversity and narrower EBITDAR margins of 19%-20%. Optus has a robust mobile and fixed-line position compared with TM, but this is offset by its higher net leverage of around 3.0x and weaker EBITDAR margins. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Group revenue to decline by high-single digits in FY21. Slow recovery of low-single digits in FY22 before picking up in FY23 - Operating EBITDAR margin of around 25%-27% (FY20: 26%) in FY21-FY23, as tough competition in Singapore and Australia and the structural shift to the lower-margin re-selling business from Australia's national broadband network offset benefits from ongoing cost initiatives. We forecast operating EBITDA (pre-SFRS 16) to decline by mid-to-high teens in FY21. - Total dividends from associates of around SGD1.4 billion in FY22-FY23 (FY20: SGD1.6 billion). - Annual cash capex of SGD2.5 billion-3.1 billion in FY21-FY23 (FY20: SGD2.4 billion), including the SGD376 million spectrum payment in Singapore. The timing is uncertain, depending on the availability of the 700MHz frequency band in Singapore. - We expect staggered investment in the digital banking venture amounting to SGD600 million over five years. We do not expect contributions to be meaningful in the medium term. - Dividend payments to shareholders of SGD1.3 billion in FY21, and dividend payout of 85%-90% from FY22 (FY20: SGD2.9 billion). - No acquisitions or divestments other than the acquisition of Amaysim for AUD250 million. RATING SENSITIVITIES Singtel Factors that could, individually or collectively, lead to positive rating action/upgrade: - FFO net leverage falling below 1.8x for a sustained period - Strengthening of linkages between Singtel and the state, which would arise from greater tangible support for Singtel from Temasek. Factors that could, individually or collectively, lead to negative rating action/downgrade: - FFO net leverage rising above 2.5x for a sustained period - Insufficient flexibility in relation to dividend payments to preserve balance-sheet quality - Weakening of ties between Temasek and Singtel. Optus Factors that could, individually or collectively, lead to positive rating action/upgrade: - Upward revision of Singtel's SCP, provided the linkages between Optus and Singtel remain intact. - Emergence of significant legal linkages between the two entities (debt guarantees from Singtel or cross-default provisions that link the two entities, for example), which may lead us to link Optus's rating to Singtel's IDR instead of the SCP. Factors that could, individually or collectively, lead to negative rating action/downgrade: - Lowering of Singtel's SCP or a weakening of the linkages between Singtel and Optus. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Adequate Liquidity: Singtel had an unrestricted cash balance of SGD688 million at end-September 2020, against SGD1.6 billion in borrowings, excluding lease liabilities, due in the next 12 months. However, liquidity is adequate due to strong access to capital markets and banks, which is underpinned by its regional market reach, robust financial position, and status as a state-linked entity. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Public Ratings with Credit Linkage to other ratings Singtel's ratings include a single-notch uplift from its SCP due to links with the Singapore sovereign. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issuers are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Singapore Telecommunications Limited; Long Term Issuer Default Rating; Affirmed; A; Rating Outlook Stable ; Local Currency Long Term Issuer Default Rating; Affirmed; A; Rating Outlook Stable ----senior unsecured; Long Term Rating; Affirmed; A Singtel Optus Pty Limited; Long Term Issuer Default Rating; Affirmed; A-; Rating Outlook Stable ----senior unsecured; Long Term Rating; Affirmed; A- Contacts: Primary Rating Analyst Janice Chong, CPA Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd. One Raffles Quay #22-11, South Tower Singapore 048583 Secondary Rating Analyst Shelley Jang, Director +822 3278 8370 Committee Chairperson Steve Durose, Managing Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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