Fitch Rtgs: Singapore Telcos' 5G Capex to Reduce Free Cash Flow Visibility

(The following statement was released by the rating agency) Fitch Ratings-Singapore/Sydney-17 November 2020: Free cash flow visibility of Singapore's mobile network operators will hinge on 5G capex increases, despite our expectations of a gradual recovery in enterprise and consumer spending in 2021, says Fitch Ratings. The country's push for a 5G standalone network should drive telecoms capex higher, with the 3.5GHz spectrum band to be freed up for commercial use next year. We believe the capex burden will be greater for Singapore Telecommunications Limited (Singtel, A/Stable) than rivals StarHub and M1, which are pursuing network-sharing through a 50:50 joint venture. StarHub plans 5G capex of SGD200 million over a five-year period, with investments front-loaded in 2H20-2021. This includes its own standalone core network and 50% share of investments in radio access network, 3.5GHz base stations, transmission and 5G spectrum cost. Meanwhile, Singtel only guided group capex for the financial year ending March 2021 (FY21) of SGD2.2 billion (FY20: SGD2 billion), comprising AUD1.5 billion for Singtel Optus Pty Limited (A-/Stable) and SGD700 million for the rest of the group. Telecoms capex would be higher in 2022 should the 700MHz frequency band becomes available for commercial use in Singapore. Near-term EBITDA recovery is likely to be gradual, as telcos turn to cost-savings initiatives and revival of enterprise spending and information communication technology projects. Singtel's yoy EBITDA decline (excluding associate earnings) in 2QFY21 narrowed to 13% against 1QFY21's 24% (1HFY21: -19%), due mainly to the modest pick-up in group enterprise and Australian consumers amid the easing of pandemic restrictions. However, weak roaming revenue, structural challenges in Optus' fixed-line business, and continuing price competition in Singapore and Australia are likely to delay a full recovery until FY22-FY23. Singtel has not provided any guidance for FY21 revenue and EBITDA. StarHub expects a 10%-12% decline in 2020 services revenue (9M20: -16%), as weaker consumer revenue amid the pandemic offset the stronger contributions from its cybersecurity business. A lack of compelling applications that sufficiently differentiates 5G value from 4G services also suggests any near-term uplift from 5G revenue is unlikely to be significant. We believe 5G investment remains critical for incumbent telcos to strengthen their competitiveness through product differentiation and network quality. Price competition could ease in the medium term, as TPG Telecom Pte Ltd and mobile virtual network operators depend on incumbent telcos for 5G wholesale services. The regulator awarded only two nationwide 5G licences to Singtel and StarHub and M1's joint-venture in 2Q20. Fitch expects telcos to manage capital prudently, including shareholder returns, to ease capex burden. StarHub reduced its half-yearly dividends to 2.5 Singaporean cents for 1H20 (1H19: 4.5 Singaporean cents), while Singtel adopted a scrip dividend scheme starting 3Q20, allowing its shareholders the option to receive new shares in the company in lieu of cash dividends. Our base-case projections envisage Singtel's yearly cash dividends of around SGD2 billion (FY20: SGD2.9 billion) and capex/revenue ratio of 18%-20% in FY21-FY22 (FY20: 14%). Potential monetisation of Singtel non-core assets could also provide financial flexibility, although we have not factored this into our forecast. Contact: Janice Chong Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd. 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